Markets are Back in Bull Mode – Or are They?

Markets are Back in Bull Mode – Or are They? The Need for Normalcy is Changing the Narrative!

When the stock market recovers, it can feel like the world itself is recovering. Are stock prices actually reflective of the state of the economy, or are deep-seated emotions altering our perception?

You’re probably familiar with the hierarchy of needs, in which a sense of belonging is considered fundamental to human existence. To that, we can add a basic need for consistency, or at least the avoidance of chaos.

There’s a good reason why the VIX, the stock market’s fear index, won’t stay above 30 for very long. People can only remain in a state of fear for so long before they adapt to what’s happening in the world. Even if geopolitical events and central bank shenanigans don’t make logical sense, people will construct their own meaning and sense to these events.

The COVID-19 pandemic provides a perfect example of this. Irrespective of people’s political opinions on masks and vaccines, after a while, their need for human connection and a sense of normalcy overrode their personal biases. We’ll never get back to the sense of normal we had in 2019, but people will construct a new normal that will be the baseline going forward.

It can’t be any other way because you can’t go back; forcing ourselves to adapt and move forward is all we can do. This might involve denying ugly truths sometimes, though, and denial never permanently solves life’s problems.

At least temporarily, the equities market has a backstop in the form of people’s normalcy bias. We believe that the market’s volatility phase that stocks have exhibited this year will persist. After all, the government’s denial of ongoing problems like high inflation, supply chain disruptions, and worker shortages isn’t making the problems disappear.

Calling the bill that’s about to be signed by the President the Inflation Reduction Act doesn’t mean that it will actually reduce inflation. If anything, it will only make the inflation problem worse in the long run by spending $369 billion on a climate agenda and an additional $64 billion on Obamacare.

Besides, one month-over-month improvement in inflation doesn’t make a trend. Yet, today’s traders have a strong normalcy bias, so they’ll look for any reason to declare that the worst is over. Even if it’s only a single, possibly isolated lower inflation print, that’s enough to stage a relief rally, which we’re witnessing now.

Thus, we have a temporary safety net in the market that consists of investors’ desire to move on from whatever realities are causing them concern and consternation. Everyone’s looking for an all-clear signal for capital to consolidate and typical bull market conditions to resume.

Yet, the cracks in the foundation of the economy are still there, and some danger signals are only getting louder. For example, high interest rates have made housing less affordable than it’s been in a very long time, and the demand side of the housing market equation is crashing.

We can also point to the mass tech layoffs since famous names like Netflix, Twitter, Robinhood, Coinbase, and PayPal have been letting workers go this year. It all makes the Bureau of Labor Statistics’ 3.5% unemployment reading seem awfully disingenuous – or at least misleading.

We can also point to the ongoing crisis in Ukraine, which will keep natural gas prices high for the foreseeable future… China’s unmistakable signals that it plans to invade Taiwan… We could keep going, but the point is that the problems are still there and you don’t have to let other people’s normalcy bias lull you into a relaxing – but ultimately costly – sense of complacency.