Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide. Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business
since 2008, sending it daily shortly after the market close.
The opinions expressed below are my own
Bears at the helm. The nonfarm payrolls data (200k vs 180k est & 160k prior revised from 148k) finally mattered. US equity futures were down about 15 handles at the time. At the release Treasuries across the curve sold off….then equity futures followed. Equity futures climbed back to down 15 and stayed there until the open. That’s the set up. The rest of the day just cascaded poorly from there, although it was orderly.
Let’s discuss…
Strong labor data is spooking the bond market. This is the *usual
* reaction of the bond market to strong/frothy economic data. This reaction has been absent from the bond market for about 2-3 years… so equity investors have forgotten (conveniently) that good news is bad news (for financial markets). We are all remembering now. Wage data had some whiffs of inflation in there too… so that was the icing on the cake. Just a heads up that inflation worries are creeping into the bond world. *THAT’S A VERY BIG DEAL!
*Don’t panic!
Understand that the markets will no longer trade in the same manner and with the same dynamics as in the past two years. We are going back to the old ways. Right or wrong, the bond market vigilantes are returning to flex their muscles.
Equities are not doomed and the bear market isn’t (necessarily) just starting. The equity market is simply transitioning. We are leaving the optimism-only, sentiment-only phase of equity market history. We are entering the valuation-matters, what’s-the-Fed-going-to-do part of equity market history.
This means it’s going to be rough sledding for the bulls. I think the top is behind us. I don’t know whether we’re going to tread water in a wide range, say 2600-2800, or whether we’re going to give back 10% or more of the froth we’ve just seen.
Some things to think about:
- 2729 is 5% off the all-time highs o We are still in the longest stretch of time *since 1929* without a 5% drawdown o 403 consecutive trading sessions and counting…. o We set the record on Jan 22 (394 sessions was prior record)
- 2586 is 10% off the ATHs
- 2298 is 20% off the ATHs o This would be the technical definition of a bear market o This is *about* where the S&P would be valued at historical average valuations
DON’T PANIC!
*I simply want you to think about downside risk. You/we haven’t had to concern ourselves about it in a long time. Now it’s different. I doubt we get the 10% pullback but I think 5% is happening. The questions are:
What do you want to do before then?
What do you want to do when it happens?