Published May 10th 2022

Daily Brief - Why bulls root for stocks to go down (first)

Elon Musk, the CEO of … soon pretty much everything, is apparently into NFTs. The soon-to-be Twitter owner has changed his avatar on Twitter into a collage of Bored Ape NFTs. For those of you not as in touch with the NFT space, Justin Bieber dropped about $2MM on two pieces of the Bored Ape collection a few months back.

Be that as it may, Elon Musk tweeted a glimpse of his vision for the social media platform on Friday.

“If Twitter acquisition completes, company will be super focused on hardcore software engineering, design, infosec & server hardware,” Musk wrote. “Managers in software must write great software or it’s like being a cavalry captain who can’t ride a horse! Also, work ethic expectations would be extreme, but much less than I demand of myself.”

But seriously …

Last week, stocks “ripped” when it became clear the Fed favored a more measured (i.e. no 75 bps hike) tightening path. However, this may be self-defeating.

A stock rally eases financial conditions and counters, upfront, the Fed’s desired tightening path. How can the stock market impact real economic activity? Quite a few different ways, actually. Higher equity prices further stimulate growth in consumer spending through the wealth effect, for example. Higher market capitalization also allows corporations to fund - through borrowing or equity issuance - further business growth.

The Fed has to stay ahead of the market to reassure bond markets that they are in control. A good metric to gauge this is the 10-year yield. The price action on Thursday and Friday, painfully reversing Wednesday gains and then some, was telling: 10yr yields are rocketing higher as the bond crowd judges Fed’s action - and equity market’s reaction - to be out of touch with what is needed.

A self-defeating rally

History tells us that equity investors come to understand this dynamic - if a larger Fed hike causes a rally, it wasn’t hawkish enough - very quickly. They were coming to terms with this reality by last Friday, too. The TOGGLE analysis shows that during the first week after the Fed’s 50 bps hike markets broadly headed lower. In fact, 1 in 5 times the drop reached more than 5% as you can see below in the image from the TOGGLE Scenario tool.

toggle scenario may 9 2022

In conclusion, as they watch stocks go down, the bulls should cheer them on (for now). That will feel difficult for anyone as they recall the depths of March 2020 declines - and watch their portfolio lose money - but this has historically been the necessary phase to brighter days ahead.

Idea Spotlight: Wayfair

Wayfair's realized volatility increased to 129.92 and historically, this led to a median increase in price of 47.88% over the following 2W. TOGGLE analyzed 6 similar occasions in the past to produce the median projection and this insight received 6 out of 8 stars in our quality assessment.

Have you checked out our Youtube? Given the future outlook of the company (and industry), we expected Wayfair stock to deviate from its expected path. Watch the video to learn more!

Daily Brief - Why bulls root for stocks to go down (first)

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