Weekly Risk Signals

The economy is clearly slowing and the unexpected rise in the unemployment rate was a major catalyst in pulling the floor out from under equity prices. But it’s the reverse yen carry trade that is the primary driver. It’s not unreasonable to think that this unwind has a long way to go. And let’s not ignore the fact that the Fed seems to be behind the curve again.

Small-caps are getting all of the attention right now, but there’s an unquestionable shift towards the risk-off direction happening in large-caps. The bond market is still its own animal. This is still to this point a massive rotation within equities and there’s no real sign that investors are abandoning stocks altogether.

We now have three indicators signaling risk-off conditions even though market breadth noticeably improved last week. Overall, it’s an environment of mixed signals - Treasuries aren’t moving and volatility is still relatively low vs. a sharp decline in mega-cap tech and a rally in gold. Investors seem a little more attuned to economic conditions following Powell’s concern about growth getting stifled.