A stock-market paradox, in which bad news about the economy is seen as good news for equities, may have run its course. If so, investors should expect bad news to be bad news for stocks heading into the new year — and there may be plenty of it.
Meanwhile, markets are behaving as if the worst of the inflation scare is in the rearview mirror, with recession fears now looming on the horizon, said Jim Baird, chief investment officer of Plante Moran Financial Advisors. A ‘reverse Tepper trade’ Keith Lerner, co-chief investment officer at Truist, argued that a mirror image of the backdrop that produced what became known as the “Tepper trade,” inspired by hedge-fund titan David Tepper in September 2010, may be forming.
The current setup is one in which the economy is going to weaken, taming inflation but also denting corporate profits and challenging asset prices, Lerner said. Or, instead, the economy remains strong, along with inflation, with the Fed and other central banks continuing to tighten policy, and challenging asset prices.
Stocks, which had posted moderate losses after the Fed a day earlier lifted interest rates by half a percentage point, tumbled sharply. Equities extended their decline Friday, with the S&P 500 SPX logging a 2.1% weekly loss, while the Dow Jones Industrial Average DJIA shed 1.7% and the Nasdaq Composite COMP dropped 2.7%.
It’s no longer an environment that favors high-growth, high risk equities, while cyclical factors could be setting up nicely for value-oriented stocks and small caps, he said.
Recession will lower inflation with unemployment.
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