Too much information from markets is jamming up real-time trading models

Sometimes up, sometimes down, share prices and yield curves are bouncing around so much that discerning a macro message is borderline impossible. Two gains and three drops in the S&P 500 this week left it down 6% on the year, but up 8% from its low. Which message to heed? Bonds are equally indeterminate. The 2-year/10-year yield curve has inverted and un-inverted in the space of two weeks.

“The reality is signals in the marketplace right now have a lot of noise,” said Anik Sen, global head of equities at PineBridge Investments. “When you have a signal that is not particularly clear, that range of outcome is very wide.”

Bloomberg

Research from Goldman Sachs Group Inc. suggests trying to discern a recession signal from stocks is generally futile. Mistakes are made, the study found, by people looking for indications that don’t exist. Equity markets behave the same 12 months before an economic downturn as they do any other time, for instance.

That’s bad news for investors who persist in searching for clues to help them navigate an expanding list of known unknowns, from the path of Federal Reserve monetary policy to war in Ukraine. All the uncertainty has prompted Victoria Fernandez and her team to shorten their investment horizon to deal with ever-shifting market narratives.

“The problem right now is we don’t really know what’s going to happen. We don’t know what earnings are going to look like. We don’t know exactly what the Fed’s going to do,” said Fernandez, chief market strategist at Crossmark Global Investments. “Things seem to be changing every day.”

The changes are often drastic. Just consider: in January, bond traders were pricing the Fed’s benchmark rate at no higher than 1% by the end of this year. Now, they’re anticipating it at 2.5%.

Bloomberg

A few months ago, a spike in Treasury yields was viewed as a boost for financial stocks and a damper for utilities. This week, the opposite happened as investors shunned banks and sought safety in dividend-paying companies amid another leg up in rates.

In fast-moving markets, clean messages are scarce.

Economically sensitive stocks like shipping companies and semiconductor makers tumbled this week, echoing Wall Street warnings that the risk of a recession is growing with the Fed set to speed up monetary tightening to rein in runaway inflation.

Meanwhile, angst over a serious economic downturn appeared to be subsiding in the bond market. After the yield inversion ignited paranoia last month, the spread between two-year and 10-year Treasury yields has again turned positive.

“It’s too early to position for that full-on recession,” said Zachary Hill, head of portfolio management at Horizon Investments. “But it is time to dial back some risks a little bit.”