TSP

This is a very macro-heavy environment, meaning that the fate of individual companies in terms of their earnings and growth, is significantly impacted by forces outside of their control. This is always true to some degree, but 2020-2021 is one of those particularly macro-heavy periods of time.

Lyn Alden

Global equity markets continue to be in a bearish trend since the start of September, despite showing some life in the past few trading days.

The S&P 500 (tracked by the C Fund), for example, closed slightly lower last week compared to the week prior, and is down about 8% from its high point that it reached early this month.

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There was a decent rally last Friday and this Monday, which pulled equity indices back up from their lows, but it remains to be seen if that is just a bounce before going to lower lows, or a period of stabilization that could mark a local bottom.

Chart Source: YCharts

For me, looking at MACD is my technical indicator of choice for the moment due to having a relatively clean setup, and it is shown in the bottom panel of the chart above. This is a momentum indicator that compares a longer-term moving average (orange line) to a shorter-term moving average (blue line). At the moment, the shorter-term moving average is firmly below the longer-term moving average, indicating bearish trend. If that turns positive, I’d consider it a bullish sign.

One big trade: inflation or deflation

This is a very macro-heavy environment, meaning that the fate of individual companies in terms of their earnings and growth, is significantly impacted by forces outside of their control. This is always true to some degree, but 2020-2021 is one of those particularly macro-heavy periods of time.

This is because the overall economy was at generationally high debt levels, and was struck by the pandemic and associated shutdowns and behavioral changes. In response to that, record amounts of stimulus was spent into the economy, which helped offset some of that impact.

That stimulus mostly ran out at the end of July. Lawmakers have been discussing another round of stimulus for a few months now, but it has remained in gridlock, so over the past two months, the economy has been running in a mostly non-stimulus mode, and slowing down.

The Treasury issues normal bonds, as well as inflation-protected securities. The market then prices those securities at different yields, and the difference between their yields is known as the “breakeven inflation rate”, meaning that it’s the long-term consumer price inflation rate that the market is currently pricing into their bond purchases.

In March of this year as the economy shut down, inflation expectations took a nosedive, but quickly rebounded due to the stimulus. However, those inflation expectations began rolling over at the start of September.

If we chart those inflation expectations (in blue below) alongside the broad stock market (red line below, which includes large caps and small caps and almost all public companies), we can see how tightly correlated they are:

Chart Source: St. Louis Fed

This is because, as far as the market is concerned, it’s mostly one big trade: inflation or deflation, including stimulus or no stimulus.

This question about when lawmakers will pass another stimulus bill, and how big it will be, would have a notable affect on consumer balance sheets and the companies they shop at, and consequently effects the equity market.

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2020 Federal Employees Handbook