Stock market ‘nightmare’ chart now a reality: Morning Brief

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Wednesday, October 12, 2022

Today’s newsletter is from Ethan Wolff-Mann, senior writer for Yahoo Finance. Follow him on Twitter @ewolffmann. Read this and more market news on the go with Yahoo finance app.

One of the more interesting analyzes being broadcast is a chart included in Bank of America’s Survey of Global Fund Managers.

It’s the “Highest Tail Risk” chart over time, showing what roughly 250 fund managers see as the rare but familiar wild in the deck that could reshuffle markets in a potentially awkward way.

I have been reviewing this chart ever since I started reading my fellow Morning Brief author Sam Ro and the serve as a time capsule for market watchers.

Remember when Trump’s tariffs and the trade war with China were the hot topics? Or Brexit and the disintegration of the EU? What about the years when there was the fiscal cliff and the financing of the sovereign debt of the EU? COVID-19? The 2020 elections? Or that moment when the conflict with North Korea suddenly came to the forefront of people’s minds?

Since last spring, Inflation/Hawkish Central Banks has topped the table as the biggest tail risk of concern to fund managers.

BofA Global Fund Manager Higher tail risks

The current situation: We’re in a bear market, down about 25% since January 1, and facing ongoing inflation that the Fed incorrectly said was transitory (with the shortage, it made sense, right?). Now that the Fed is aggressively pursuing the problem and acknowledging it, markets continue to slide.

The nightmare these fund managers had seems to be coming true.

Still, tail risk doesn’t always manifest itself, as the Bank of America chart shows, or rather, it doesn’t always manifest itself in a hugely impactful way. Covid did it and crashed the markets by 25%, which recovered in five months. The trade war also fears depressed growth in the fourth quarter of 2018, which lasted for, well, a quarter before the market found hope again.

What is puzzling is that even if consensus tail risk becomes a reality, why is it so difficult to use this information as an investor? These are not unknown risks, black swans, or little-known fears. These are the things that people could “see coming”. Mohamed El-Erian, who acknowledged the Covid crisis early, said “the economy is starting to go through the windshield”, suggesting there are some lows to be tested in the coming months.

DataTrek’s Nicholas Colas reminded us in a newsletter this week why it’s so tough, noting that while the S&P 500 is down more than 23% year-to-date, “9 individual days make up that whole drop.”

“Without them, in fact, the index would be up 8.6% year to date,” Colas wrote.

The bad days, he noted, largely occurred on days with bad macroeconomic or Fed-related news, events that are normally scheduled! So even though Colas suggests caution in releasing Thursday’s CPI, another one of those timed events, the flip side of the risk coin is that stocks can go up too, and that big winning days are equally responsible for the upside path. From the market. and to the left Just because you know what’s coming doesn’t mean you know what will happen when it arrives.

what to see today


  • 7:00 a.m. Eastern Time: MBA Mortgage Applicationsweek ending October 7 (-14.2% over the previous week)

  • 8:30 a.m. Eastern Time: PPI excluding food and energyyear over year, September (7.3% expected, 7.3% over the previous month)

  • 8:30 a.m. Eastern Time: IPP Final Demandmonth over month, September (0.2% expected, -0.1% over the previous month)

  • 8:30 a.m. Eastern Time: PPI excluding food and energymonth over month, September (0.3% expected, 0.4% over the previous month)

  • 8:30 a.m. Eastern Time: PPI excluding food, energy and trademonth over month, September (0.2% expected, 0.2% over the previous month)

  • 8:30 a.m. Eastern Time: IPP Final Demandyear over year, September (8.4% expected, 8.7% during the previous month)

  • 8:30 a.m. Eastern Time: PPI excluding food, energy and tradeyear over year, September (5.6% over the previous month)

  • 2:00 p.m. Eastern Time: FOMC meeting minutesSeptember 21st


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