Does the Market Know Something that the Average Investor Can't See?


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Is a recession, or worse, another financial crisis, around the corner? Is QT (quantitative tightening) finally wreaking havoc on risk that deep down we all suspected it might?
Here are some comments from Fidelity:
- Bottoms generally form when markets stop going down on bad news. We are likely not there yet.
- Not every 20% bear market turns into something worse. Nor does it always mean recession.
- With price-earnings ratios at 14x - 15x, earnings growth probably at 5% or so, and a Fed that is ready to step aside should its benign forecasts not materialize, I think we are getting fairly compensated for market risks.
Is the market blindly and incorrectly overreacting to the current late cycle narrative of a tightening Fed, a flattening yield curve and slowing growth, and pricing in a recession scenario that isn't going to happen, at the same time that forced selling by momentum traders is having an outsized impact resulting from the current lack of liquidity?
My sense is that it's the latter, made orders of magnitude worse by the combined technicals of forced selling and poor liquidity. If you look at the 4 phases of the business cycle, it's easy to assume that a recession follows late cycle just like night follows day. It doesn't always happen like that, especially this time around, when the Fed is now very much tuned into the downside risks.
What seemed like a run-of-the-mill correction of 10% recently has now turned into a 20% bear market. Countless headlines that may follow should the market fall below the 20% bear market threshold could make investors question whether to sell stocks at a time when they should probably be considering the opposite (rebalancing into a down market is generally a good strategy).
Rather than following our primal fight or flight impulses and wanting to sell-sell-sell everything, we need to take a good rational look at what the market is offering and decide accordingly in the most unemotional way possible.
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