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Markets are not out of the woods

Every investor has been paying attention to recent macro data about the US economy, in order to understand how it has been hit by the Covid-19 crisis.

And released data were very bad. In the HST model the fundamental analysis is represented by the HST Fundamental Indicator, which has turned NEGATIVE this week. (Please see here for more details.)

In recent years it was just temporarily negative, only in Oct-2016 and Feb-2019. This looks a much worse condition, as it appears that the drop (of stock's prices) will last for more time, and it will trigger a recession (less earnings for companies, or losses) that nobody can yet evaluate its duration and depth.


Let's see some of the indicators which are involved in the maths behind our HST Fundamental Indicator:

Fundamentals

  • Inflation is low, but data of March is not available yet.
    The huge Quantitative Easings set by Central Banks (FED and ECB) will provide credit to people and companies in these hard times, but remember that printing / pushing money into markets is not = creating health.
    If there is more money around, but less goods available, prices will rise.
    We shall pay these easings (which are necesssary, no doubt) in the long term with higher prices.
    In the short term, some important goods (energy) had a drop of prices, so the measured inflation could be non so high in first stages.



  • Companies are getting worse. The manufacturing ISM has decreased in Feb-2020.
    It tipically goes under 50 during recessions (see 2001-2002 2008-2009)



    See also a good indicator for the state of the economy, often anticipating recessions, as the heavy truck sales:



    Credit conditions for companies are still good, thanks to the move of the Central banks.

  • The Yield curve is steepening and this is typical to happen before recessions, but  it is not a leading indicator for recessions. It is much slower.



  • The Housing market data are still a step behind. Need some more time before we can evaluate properly this sector.

  • The Labour market was doing very fine right until few weeks ago. It has been harly hit by the social-distance policies, and the drop of jobs in many sectors.
    This is a quite precise predictor of recessions (Initial Claims), and it is getting awful (I had to cut the spike on the right because it was too high to show, it is not 1M , but over 6M).
    Unemployment has boomed, and this is a typical to happen before recessions.



    (sources: FRED economic data)

Conclusions:

The Covid-19 crisis is triggering a massive recession. We can see in in the streets and in the people's behavior. Everybody agrees there will be a recession, but none knows how bad will it be.
Some tips:

  1. We are not facing a war: factories are not destroyed by bombs, just shut down as during holidays. If the contagion is defeated or somehow limited or managed, the recovery could be very quick and strong
  2. Some sectors will be deadly hit, some other will rise. Unemployment will be the main symptom of this transition.
    Higher unemployment rate means that people will consume less and will not payback its debts eniterly.
  3. This could bring risk of credit crunch, but Central Banks seem to be ready to fight it
    We should expect a long period of stagnation, where companies are not 100% operative, many people have no job, some sectors of economy will be in deep pain. Unless...
  4. A scientific breakout happens during next months (vaccine, new tests, or just the rumors about them).
    This could change the whole game in a very short time, and markets would react in a spectacular way

How the HST model will respond

From our perspective (long term investors), the HST model has cut the most part of possible losses, we have stepped aside, waiting for volatility to shrink.
So we are in an ideal position to catch the next bull market, whenever it will be.
     

Note that, also during a bear market, the HST model is NOT always positioned CASH. It often jumps in to catch internal reallies. See here.

Members of the Educational HST service gets daily signals coming from the model and can respond with proper actions.

 

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Write to This email address is being protected from spambots. You need JavaScript enabled to view it. and get more information about daily signals from the HST model released to members.

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Write to This email address is being protected from spambots. You need JavaScript enabled to view it. and get more information about daily signals from the HST model released to members.

 

Who is Hari Seldon

(from Wikipedia)

Hari Seldon is a fictional character in Isaac Asimov's Foundation series.

In his capacity as mathematics professor on the planet Trantor, Seldon develops psychohistory, an algorithmic science that allows him to predict the future in probabilistic terms. On the basis of his psychohistory he is able to predict the eventual fall of the Galactic Empire and to develop a means to shorten the millennia of chaos to follow. The significance of his discoveries lies behind his nickname "Raven" Seldon.

Our team decided to dedicate this work and this model to this amazing character, creating the even-more-fictional character of "Hari Seldon Trader".