Sell Off Thoughts

Subscribers Only

Access all of BehavioralMacro's premium content and the private Twitter feed via Premo

Validate Twitter

Not a subscriber yet?


Powered by

Validation unsuccessful.

Please subscribe to access the premium content.

Here are my thoughts on the current sell-off. On overbought conditions alone we should sell off further from here. If I had to put a rough number on it, totally guessing, I would say another 3 to 5%. But there are three risks that could turbo charge this into a bigger sell-off.

The first is the return of the virus story that reverses reopening steps–not just slows down phased implementation. We all see a decent number of states now where hospitalization is still increasing and the probability of some of them going ‘epidemic’ is growing rapidly. It’s already becoming part of the market narrative, now risk markets have started to sell off. Some states have already started to slow down their phased reopening plans. If we get to the point where states have to start outright reversing elements of their reopenings, I think the PTSD from the last sell off would kick in pretty quickly and would likely turn an oversold correction into something bigger.

The second risk is that the economy is not sufficiently reopened when the fiscal assistance starts rolling off. This is a bit of a foot race. I’ve been impressed by the speed and Ingenuity with which the private sector has figured out ways to get back to work. but the fiscal assistance was pretty massive and parts of it will start rolling off fairly soon. If enough people haven’t found, or haven’t returned to, work by that time, this will start showing up in the data market will likely react to it. We’re not quite at that point yet, but it could come at any time this summer.

The third risk is if Trump. If he continues to slip in the polls and in popularity, if he increasingly feels cornered, it is likely he will do increasingly risky and desperate things. He has control over a lot of powerful levers, and I think by now it’s not too political to use as the prior that he will do as much to help himself as he thinks he can get away with. Based on what we’ve seen thus far in his presidency, it’s no longer a given that the system or GOP senators will stop him. It may still be likely, but it is not a given. In short, there’s little basis for believing Trump wouldn’t at least try, which, if dramatic enough, could roil the markets. For example if he tries to invoke the military in any way, or if he starts to lay the political predicate for rejecting the election results.

Of these three risks I think the most important and likely in the near term is the first one. If we start to see states not just delay but actually start to reverse steps towards reopening their economies, hard to see in the current set up how that wouldn’t be a market catalyst for a deeper leg down. This is the narrative evolution I will be watching for.