Treasury Secretary Scott Bessent has warned that the economy may need to undergo a detox period before it returns to more stable growth. Since that warning, stock prices sharply pulled back and the VIX Index spiked to above 60, which are levels not seen since the 2024 bottom, the COVID Crash and the GFC. Related sentiment indicators, such as the term structure of the VIX, inverted, indicating high levels of fear. The market subsequently experienced a Zweig Breadth Thrust, which is an indicator of price momentum consistent with market bottoms. Is the detox over and is the bull back?
I don’t think so.
The stock market isn’t the economy, but it is nevertheless related to the economy. Investors need to distinguish between the likely economic effects of events and the market reaction to the events. The initial VIX spike to over 60 in the wake of the “Liberation Day” announcement was consistent with the blinding end-of-world fear that occurs at market bottoms. Usually, the subsequent bottom has been accompanied by the reduction or elimination of tail-risk by policy makers. This time, the tail-risk of a recession is very real and there are no signs of significant policy mitigation.
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