Equity markets have been quiet since the end of March, trading in tight ranges of less than three percent across most indices. That is rather surprising, given everything that is happening and what is reflected in other markets. Oil, Lumber and Copper seem to be pricing in a recession. Bonds are weighing the persistent effects of inflation versus the weakening state of the economy. There is also the debt ceiling that keeps looming larger, and who knows what that means for the US Dollar.
If it all feels like the calm before the storm, we have to ask ourselves, could it really go either way? Perhaps we muddle through with a soft recession, inflation comes back down to earth, interest rates follow and hey, we might even turn those printing machines back on. Or the next crisis is too big for even the Fed to bail out, energy prices rise as the war in Ukraine rages on, and Boris Johnson becomes prime minister again.
In times like these, and destination unknown, the answers lie on the fringes. We want to look at those investment instruments that are the most sensitive to the prevailing event risk, the most volatile, and the most likely to wipe out any investor that is caught on the wrong side. Welcome our new best friends, KRE, the regional banking index, XRT, the retail index and ARKK, the froth index. If they go up big, then we are in a new bull market. However, if they are getting clobbered, then you better Run Like Hell (Pink Floyd, 1980).