In the 4th quarter, U.S. equity beta went from highly desired to migraine inducing. There was a spike in risk aversion as investors dumped equities (growth stocks and small caps in particular), preferring the safe haven of bonds and precious metals (see Figure 1). Trade tensions with China and the potential global ramifications, worries of an overly aggressive Federal Reserve, the appearance of downward earnings revisions, and President Trump threatening to shut down the government over border wall funding all contributed to negative sentiment in the quarter. Growth worries were accompanied by spikes in volatility, widening credit spreads, and increasing chatter that the bull market in equities/risk assets was ending. While one quarter hardly makes a trend, there is concern about what happens when a generation of investors trained to "buy the dip" and algorithms created in a zero interest rate, low volatility biome, grapple with the curtailment of Central Bank supported capital markets and a new volatility regime. While hardly canon, the New York Fed's recession model jumped significantly in the quarter, putting the probability of a recession in the next 12 months at over 20% (see Figure 2).
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Posted on Monday, January 28, 2019 @ 2:10 PM
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