We've Changed Our Mind
Never before in history have we witnessed such a stark difference between these indices
The other day, I received a question that truly makes one ponder - how is it possible that there is such a pronounced divergence in the markets? Half of the financial world seems convinced that a recession is just around the corner, while the other half believes that the bull market still has room to run.
When considering the investment thesis for an impending recession, there are several factors that make it plausible. Perhaps the most striking of these factors is the relationship between the Nasdaq and the Russell 2000.
Never before in history have we witnessed such a stark difference between these indices. Not even during the dot-com bubble or any other period. Allow me to jog your memory about what happened in the year 2000, one of the most significant black swan events of all time. Technology companies saw their valuations plummet by around 80%, with many disappearing altogether. A few, the lucky ones, emerged as the industry leaders we know today (e.g., Amazon, Microsoft, etc.).
On the bullish side, we have the reduction in unemployment, signaling that a recession may be averted. This is both an early indicator of an economic downturn and a sign that the Federal Reserve (the Fed) and other central banks will provide stimulus measures.
Remember, the Fed steers the course of the economy.
In essence, we have compelling narratives for both bullish and bearish scenarios, as depicted in the chart below.