Crypto News: Nowhere Near a Bearish Tipping Point: Everything Risk

Over the past week, the market has been playing out my thesis about market risks being larger than institutional investors think. But while I'm more bearish than bullish on risk assets these days, I don't think we've reached an actionable tipping point. These are just jitters. The potential for new equity highs still exists if the economic and market risks fade.

So let's outline what those risks are and create a framework for thinking about how they bring the market to a bearish tipping point or allow risk assets to resume their upward path.

I'd break down the argument I am going to present this way:

The synopsis from last week was that fear had increased for individual investors, who were rightfully worried about downside risks, while institutional investors remain positioned for equity market gains.
This juxtaposition reflects the need for money managers to remain bullish to beat their benchmark indexes in a rising market counterbalanced by negative economic surprises that individual investors have reacted to.
Growth-retarding policies from the Trump Administration exacerbated individual investors' negative sentiment, catalyzing a correction in the Magnificent Seven stocks that had led the market higher.
With firms like Apple still increasing capital expenditures and Nvidia just about to release earnings, we could see a bounce higher after this brief scare.
If the tipping point comes, it will come from hard economic data showing weakness, not from sentiment. And because markets are poor at hedging downside risk in uncertain environments, the tipping point will provoke an abrupt move lower.

There's no need to panic here

The Roundhill Magnificent Seven ETF, which allows investors direct exposure just to the seven tech giants leading the market, traded down into official correction territory yesterday. It closed just over 10% lower than the Dec 17 all-time high, with most of the decline coming in the last week on basically no real Mag 7-specific news.

What that tells us is that the individual investor bearishness we saw last week translated into losses as negative economic data and headlines hit the tape. You can see the data piece of this by looking at the Citi Economic Surprise Index, which has dipped into negative territory, telling us that we're now getting more negative surprises than positive ones. A litany of headlines about federal government job cuts and tariffs, both of which reduce consumer purchasing power, only added to the downbeat sentiment.

But how bad is it really? So far, not that bad. Yes, consumer confidence has cooled significantly, even showing recession fears. And jobless claims increased due to federal government layoffs. But the Conference Board consumer confidence data aren't "hard" economic figures, they just reflect sentiment. Furthermore, the jobless claims increase was mild. And that was probably the biggest piece of hard macro data the US saw in the last week. That all points to a potential growth slowdown, not yet to a recession, as the longer time series of the Citi Economic Surprise Index shows.

Sure, we've reverted to the mean in terms of economic surprises (and even a bit below). But recessions happen when data deteriorate much further.

You've got to stay fully invested to beat the index

To wit, last week I noted that, despite increased individual investor nerves, both the S&P 500 and the Nasdaq 100 have been at the top of the post-election trading channel since the inauguration. I take this as a sign that many investors are still holding out for the tax cuts and deregulation promises from President Trump to help markets take the next leg higher. They are looking for confirmation that the tariff, deportations and especially job cut policies from the Trump Administration won't do a lot of damage to the economy. We learned last night that those tax cuts can soon proceed. And markets have already started moving back up.

If you're a fund manager measured against an index benchmark, it's hard to be bearish or raise lots of cash in those circumstances, even after a 10% fall. Until we see something more concretely ominous, it will pay to remain optimistic about the US equity market.

Nvidia will be a good marker

Two leading actors in the artificial intelligence space recently showed us conflicting evidence on how long this wave of investment will last. Where Microsoft is purportedly dropping some data center leases, Apple is pledging to make huge investments in the US as it shifts away from China — $500 billion over the next four years. So that's the backdrop to the Nvidia earnings report that drops after market close Wednesday. Given the shifting market sentiment and the conflicting stories about further data center demand, Nvidia could be a catalyst in either direction.

Analysts see good results coming yet again. We've seen all of the earnings from the leading megacap technology companies except Nvidia now. How the market reacts if they are good but not knock-the-cover-off-the-ball good will tell you how deep these market jitters run. My expectation is that the results will be good enough to leave us trading within the post-election range — but not a clear breakout higher until the uncertainty involving tariffs, job cuts and deportations passes or the tax cuts bill passes.

Framing this from a downside risk perspective

If I had to sum up where we have traveled since September, I would highlight three things:

Investors have been acting as if Trump 2.0 will be similar to Trump 1.0 when the US president staffed the executive branch with old-school Republicans, who resisted his more authoritarian and protectionist impulses. The result is they greeted his rising electoral chances and his election as a positive for markets.
The reality is that Trump is a lame duck who learned bitter lessons from his first time in office about staffing the administration with anyone who is less than 100% loyal. He is deadly serious about closing the border, about protectionism, about withdrawal from the US's role as global cop, and also about purging the federal government of the so-called deep state.
That means he is likely willing to accept significant market pain to achieve his ends on all of those fronts. He might even be willing to cause a recession as the chief US economist at TS Lombard recently suggested — especially if he thinks the economy can recover quickly enough for the midterms, protecting Republican majorities in Congress.

This means we have considerable downside risk that isn't being priced in. Moreover, markets have a hard time pricing in these kinds of risks until they materialize, simply because you get punished as a money manager for underperforming the index in a bull market. That means institutional investors will have a bullish bias right up until any downside risk materializes. And then they will have to reverse direction furiously.

My framing, then, as we saw in 2007 and again in 2020, is that it's usually clear sailing for risk assets right up until the bitter end. Stocks could even hit new records if Trump's tariff and deficit cutting bite prove less ferocious than his bark. But once we get to a major economic trigger, things will shift quite abruptly. I'm watching jobless claims now as my real time proxy for "catastrophic" risk. Only when they balloon — +50,000 on initial claims in a short time span and remain at that level for a few weeks — do I think it's time to hit the panic button.

Even so, considering all of these mini-panic warnings the shift will be dramatic when it comes.