Strategy Note /
Global

Two Sided Markets

  • Our Monthly noted markets have been extrapolating trends of late - be they inflation, Fed response, risk asset reaction

  • The Q now is whether they should continue to do so - we suggest not & highlight the Q4's equity start as more two sided

  • Weight of evidence suggests inflation, incl labor & housing is rolling over, we expect the USD to follow & non US to OP.

Jay Pelosky
Jay Pelosky

TPW Founder & Global Strategist

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TPW Advisory
7 October 2022
Published byTPW Advisory

As we wrote in our recent Monthly  Extrapolation & Beyond, the markets have been taking current trends, be it inflation, Fed response, market reaction etc. and extrapolating them. Given the roughly year long trend of inflation surprising to the upside and the Fed following through with three 75 bp hikes in row – its been the right approach.

 

We then posited that to continue that approach would be risky, arguing that we are approaching a turn or reversal in many of these traits at a time when markets are positioned in a very one sided way. Well, we saw what that a data point or two in the opposite direction – JOLTS for example, means in a near 6% rally for the SPY over the 1st two days of the quarter – a record move for a Q4 start.

 

This suggests to us that the starting point of a move away from extrapolation is to create a two sided market, one where the pendulum can swing either way, keeping investors from tipping too far in either direction and perhaps reducing the potential for that big down draft some are waiting for by increasing the potential for a big up move.