Recession fears persist

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Key points to remember

  • Goldman Sachs increases the likelihood of a recession
  • Bitcoin
    BTC
    Under pressure
  • Can the markets keep their gains

It’s a shortened holiday week with little news, but as I mentioned a few weeks ago, quiet news weeks have a way of surprising. Stories that might otherwise be swept under the rug can take on a life of their own. For retail traders, don’t be fooled, especially when implied volatility continues to trade well above its historical average. Growing worries about a recession are also unlikely to help ease market anxiety.

Recession fears have been central for much of this year; however, the odds of a recession increase. More recently, Goldman Sachs doubled the odds of a recession from 15% to 30%. At some point, talking about a recession can become a self-fulfilling prophecy. Businesses are starting to make adjustments instead of the perception of an impending downturn. Layoffs and spending cuts based on fears of a slowing economy have the effect of creating a slowing economy.

Concerns about the weakening economy were echoed this morning when Lennar
LEN
announced earnings. Despite positive numbers that surprised on the upside, management said demand fell due to rising rates. The housing sector is under scrutiny for signs of slowing demand and we will come back to that more closely when existing home sales figures are released later this morning.

Over the weekend, we saw bitcoin drop well below $20,000, all the way down to $17,000. As a precursor to crypto assets, the precipitous drop draws a lot of attention to the future of crypto assets. At its peak, the crypto market had an estimated value of over $3 billion. Today, that valuation is closer to $1,000,000. While this might be concerning for long-term crypto holders, I don’t necessarily see it as a bad thing.

As the markets mature, the herd must be culled from time to time. Much like a healthy wildfire, markets need to purge themselves of the weaker assets so that the stronger ones have a chance to thrive. We’ve seen this same process play out in the dot com era, when many overnight success stories broke, allowing companies like Amazon
AMZN
for example, to emerge as a market leader.

In premarket trading, futures point to a positive open. Oil, although rising at the moment, has retreated from recent highs. That and a possible gas tax exemption could ease some inflationary pressures at the pumps. But retail traders should remain aware of current levels of market volatility. Recent rallies have been faced with increased selling pressure. Let’s see if this time the markets can hold on to gains.

commentary by tastetrade, Inc. for educational purposes only.

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