Understanding market dynamics: Insights from Jurrien Timmer
On April 7th, Fidelity’s Director of Global Macro Jurrien Timmer, shared his insights on the current market conditions.
Here are some of the key points from his commentary.
Understanding the bear market threshold
Jurrien Timmer began by discussing the market's recent decline, which crossed the 20% threshold. This is a key indicator used to define bear markets. He emphasized that while this threshold is significant, not all 20% declines lead to prolonged downturns. Historical data shows that some bear markets reverse quickly, leading to new all-time highs.
Gauging market sentiment and technical measures
Timmer delved into various technical measures and sentiment indicators to assess whether the market is oversold enough to find its footing. He highlighted the percentage of stocks making new 52-week lows. During the Covid-19 pandemic in March 2020, this measure reached historically oversold levels, with 82% of stocks making new 52-week lows. This signaled a generational buying opportunity. In contrast, the current level is at 29%, indicating a moderate oversold condition.
Timmer also discussed the percentage of stocks above their 200-day and 50-day moving averages. These measures are currently at 23% and 13%, respectively. This suggests that while the market is oversold, it is not at extreme levels seen during previous market downturns.
Lessons from historical market declines
Drawing parallels with past market declines, Timmer explained how historical oversold levels and market behaviors can provide insights into the current market situation. He referenced the market's behavior during the Covid-19 pandemic and other significant downturns, highlighting the importance of understanding historical patterns to navigate the present market.
Timmer shared insights from the 1998 Long-Term Capital Management (LTCM) crisis. While the current market conditions differ, there are similarities in the sudden repricing and subsequent attempts to find footing. Historical analogs can serve as valuable guides, but it is essential to recognize the unique aspects of each market cycle.
The role of the Federal Reserve
Timmer discussed the Federal Reserve's potential actions and limitations in responding to market declines. He noted that the current inflation environment restricts the Fed's ability to lower rates significantly, unlike past instances where the Fed could intervene more aggressively. This limitation poses challenges for the market's recovery.
During the conversation, Timmer highlighted the Fed's historical role in rescuing markets during downturns, such as the 2018 Powell pivot and the 1998 Greenspan intervention. However, he cautioned that the current inflation environment, with rates close to 3%, limits the Fed's ability to lower rates significantly. This restriction poses challenges for the market's recovery, as the Fed may not be able to provide the same level of support as in previous instances.
Conclusion: The dollar's unusual behavior
One of the most intriguing points Timmer raised was the unusual behavior of the U.S. dollar during this market stress. Historically, the dollar tends to strengthen during market downturns due to its role as the world's funding currency. However, recent trends show the dollar weakening alongside the market, suggesting a potential tectonic shift in the global economic landscape. Timmer explained that the dollar's recent decline, despite market stress, indicates a potential shift in the global economic order. He discussed the historical correlation between the dollar and the S&P 500, noting that the correlation has turned positive, which is unusual during periods of market stress. This shift suggests that the dollar may be losing its traditional role as a safe haven currency.
