🍔Why Are Markets Rallying?

Now is not the time to be betting on recession

The S&P 500’s recovery month-to-date from a 14% drop to nearly flat is one of the best rebounds since 1950. In today’s letter, we talk about the dissonance of foreseeing a recession, yet being bullish on the market.

We are currently bullish on US stocks. We think the market has already priced in the worst expectations. Amidst a historical trade war and never-before-seen volatility, constructive price action and our proprietary technical signals are pointing upwards. This is why we listen to both fundamentals and technicals when market timing.

Macro economy

The highlight of this week was the econ data. GDP growth printed negative for the first time in three years, which caused SPX to gap down… only to be bought back up the rest of the day. This is a huge clue when the market can’t sell off on bad news — it tells us that a lot of pessimism is already priced in.

Note that the weak GDP reading was entirely related to front-loading which we covered in past posts; especially gold imports which weighed on GDP calculations. In actuality, consumption was better than expected at 1.8% annual growth. Sales to private domestic purchasers (which excludes exports and government spending noise) rose by 3%.

Friday’s employment growth printed positive and beat expectations. Despite all the concerns about business uncertainty, there’s still is no sign of mass layoffs. This is impressive as CEOs have been in stasis, and you would think cutting personnel costs is the obvious reaction to preserving profitability. All of this means that investors can plausibly believe that a recession will be avoided, even if sentiment has taken a big hit.

For example, the CFO of Bank of America said they do not believe there will be a recession in 2025. These guys have front-row seats to America’s bank accounts and loan delinquencies, and they’re telling us that defaults remain low while consumer spending is still rising. The delayed impact of tariffs means that the immediate econ data is still resilient.

So how do you trade or invest in the meantime? Do we position for a recession now or wait for better levels? It is tempting to front-run the recession, but even if there is a recession, things can look stable for several months before the eventual collapse. For example in 2007, it was extremely obvious that the financial system was wobbling and yet stocks remained resilient for another year.

When it comes to market timing, being early is equivalent to being wrong, especially on the bear side. The recession may come one day, but today is not that day. Like we said last week, you don’t want to be short a rising market, screaming: “It’s supposed to be a recession!”. The bear thesis appears to be played out (for now) and the technicals have turned bullish. Unless we get a meaningful deterioration in jobs data, now is not the time to be betting on recession.

What we learned from Mag 7 earnings

The rest of this article is paywalled. Inside, you can read about:

• Mag 7 earnings clues

• Why are markets rallying?

• Bullish market signals

• Portfolio update