Is this like 2018?
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Another jumpy week. Markets were down again (SPX -3% for the week, NDX -3.3%), but with several intraday rallies. Midweek we hit the 200-daily MA on SPX, against which the market was bouncing back and forth. Clearly it’s still a downtrend (as we pointed out last week - hopefully you held on to the hedges this week), and it’s starting to look like typical bear market price action: continued downtrend with strong rallies every now and then, as markets jump off previous support zones. In bear markets it’s never an easy and smooth path down, it’s always like this:
Even yesterday’s rally into close started after jumping off a strong support level, and was driven further up by Powell’s reassurance that the state of the economy is good. Still a downtrend though.
We have been here before.
At the start of 2018.
The first time Donald Trump was in office, he implemented his first tariffs in January 2018, aimed primarily at China (on solar panels and washing machines), and then again in March 2018, on steel and aluminum, covering about 4% of all US imports. This started the trade war with China which spooked markets immediately. SPX fell 11% peak to through from end of January to mid February.
Then in June 2018 he expanded tariffs to the EU, Canada, and Mexico, to which these trading partners responded with retaliatory tariffs. This triggered more uncertainty, markets sold off again, but not as much as first time. The grind up continued the rest of summer. This is right about when I started trading options, so I remember this period well (the emojis are an accurate representation of how that looked like!).
However, the ending of that year, Q4, was quite brutal. We were in the middle of a Fed hiking cycle, started by Yellen and continued by Powell, and that December, when the sell-off was particularly brutal (see charts), the Fed hiked to 2.5%.
It was then that bond yields started to go down, from over 3% to 1.5% in mid-2019, as investors pilled onto bonds anticipating a recession. What else were investors buying in mid 2018 well into 2019? Gold! Up 20% during the same period. A recession did eventually occur, but only because of COVID (again Feb/Mar decline, remember?). It wasn’t your typical boom-bust cycle, but all the elements were there.
Any of this sound familiar?
We can’t shake off the similarity between now and then. Especially in these early months, February and March, when markets are very jumpy, and selling is happening around periods of biggest option expiration induced weakness.
And then, from April to October, a gradual grind-up, only to unveil the second leg of the sell-off towards the end of the year in several episodes (20% peak to through).
How likely is it that we get the same thing today?