Okay folks, so in this video, we need to have a violent breakdown on what the data suggests is going to happen next in this market. On one hand, if the pace of the current recovery continues, we'd be at new all-time highs in the market in no time at all, which some would say may not make much sense given that most of the variables that cause the markets to sell off haven't really meaningfully improved. On the other hand, you could also say, well, the markets have gotten de-risked and are now a lot more forward-looking and willing to be bought up. We'll be discussing this, and I'll also be critiquing some of my earlier predictions that I made back in January.

What is true? What's not true and what we know Now after two months more of data. Okay, so context. in the middle of an overall storm, it seems like we have found ourselves in a bit of a time out despite fear and uncertainty being rampant. You've got the S P in its second winning week in a row.

You look at the overall one-month performance of the S P 500. I mean markets have re-bought a lot of the biggest names. Microsoft Up 8.5 in a month, Apple up almost 9, Nvidia, 25, Google Slash Alphabet Up 10 Amazon 13 Tesla 32 Energy segment of course has been parabolic industrials, utilities, aerospace defense, healthcare software all up huge and meaningfully. The only main areas that have been lagging are in financial services, restaurants and travel, and overall hospitality.

But overall, if you look at the one month return of the S P 500, there's a lot of inflows, but most in fact, all of that growth has been since the market's last bottom on March 15th. Since then, it's basically been all up. Of course, the 15th and the 16th was also the much anticipated Fomc meeting where the Fed finally set a somewhat firm foundation for the next 18 to 24 months and that allowed for some room for uncertainty relief to be built on top of. And coincidentally, we actually made a video back on March 14th, which was the day before that Market Bottom where we went through some of the data that we were seeing that was very bullish.

One of the big things that we talked about was how bears were getting increasingly and historically overcrowded. But the thing is that regardless of what's causing fear, you simply can't have a relentless and one-sided market taking hold forever. And when markets over a very short time horizon only listen to one emotion panic, you set yourself up for logic to kick back in, and a situation where you get a nice whiplash That's what history has dictated over and over again. And that's what happened this time Now, of course, I didn't know that the market was going to recover after I made that video, and we oftentimes cover both sides, so it's not like I predicted this.

I simply gave my usual market philosophy which includes stoicism and also being prepared for both market outcomes and having a long-term bullish outlook even though in the short run you're never knowing anything for certain. But my point in that video was that getting overheated on fear or on euphoria is a very, very common and historical occurrence. but it's not sustainable. The most legitimate catalyst will have a slower digesting period, because oftentimes if it's really really bad, people don't even really know how bad it is logically until it actually starts playing out a bit.

Initial and rapid knee jerks of markets almost never makes sense when only one side is being heard aggressively for a while you set up for a very, very strong reversal. Now importantly, just because something reversed doesn't mean that that original fear was either wrong or right, it just means that it was overcrowded. And to really explain my thought process on today's market and what we can expect, you really have to go back to my January 24th. This is where we bottom video.

In that video, I presented a worst case scenario, a best-case scenario, and a mid-case scenario. The worst case scenario: I saw earnings guidance and then growth slowing dramatically in Q1 and Q3, especially in comparison to last year, but also in comparison to guidance expectations. Meanwhile, supply chain issues reaccelerate and inflation persists, leading into a stagflation economy. This was again the worst case scenario where the Fed has to raise rates at the same time, where inflation is being very, very stubborn and economic growth is dropping.

I said possible causes of that scenario were: a new variant storage, a Ukraine invasion, anything that causes supply chain devastation. Obviously, we ended up getting the Ukraine invasion, and that's caused substantial supply chain issues. There are some virus surges in Europe, but so far people aren't really caring too much about that, at least in terms of policy making. We'll see what happens if it gets to the Us.

But the other scenario I gave was a best-case scenario where growth slows down, but supply chains normalizing consumer demand drops from 2021's accelerated levels helps calm inflation down, and that combined with weak hiring causes the Fed to be less aggressive unless you see the Fed be more accommodative. And in the mid case scenario, I saw earnings guidance and growth slowing dramatically q1 through Q3, but inflation still running hot and supply chains taking longer to get into control. And in that case, I saw the Fed having to move forward with more aggressive rate hiking. and I saw inflation taking a lot longer to start picking down, probably into 2023..

now it's about two more months later and we have a lot more info. Ukraine was sadly invaded. Inflation is picking up massively, commodity prices have jumped massively, and that hasn't really meaningfully been reflected in a lot of the data that we've seen. And the Fed is already taking action.

And they're suggesting of course, seven rate hikes and a couple of them being perhaps half point rate hikes. So right now with what we know, what scenario do I see happening? But first a word from our sponsor Masterworks. So I'm always interested in new, unique and historically effective ways to diversify my capital. I also tend to get very excited learning about new asset classes, although I am admittedly a bit of a slow learner i took Spanish for five years, but I can barely say hola.

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So buying some ownership interest in them may be smart and Masterworks can help. Now You usually have to request an invitation and get on a waiting list to join them, but if you use our link down below, you could skip all of that. So right now with what we know, what scenario do I see happening? Well, I think in reality the economy is heading somewhere between a worst-case scenario and a mid-case scenario heading in the direction of slowing economic growth and rising inflation and also Fed tightening rapidly. But that's the economy.

The market is actually now looking towards what's happening after that. Because the market got a chance to drop substantially, it had be risked significantly and was increasingly willing and able to be more forward-looking and look past the current concerns of the Fed and Russia to 12 to 18 months out, where most optimists would say that a lot of these problems aren't going to be as big of problems as they are now. We had some big stocks that sold off very rapidly, especially big tech stocks that had huge numbers and had huge numbers to grow in the upcoming years and also have a huge role in our economy just get obliterated in a very short time period obviously in big names. We didn't have a 50, 60, 70 drop, but in the short time period that we did have a drop, and in the backbone of the numbers that they were reporting, it was actually pretty crazy.

The preemptive drops were so dramatic for what data we actually had at the time. so much fear selling. And so essentially the risk profile in a lot of the biggest names came down a lot and they started becoming more and more favorable compared to anything else. Even if you're a fund manager who felt that you were heading into an inflationary recession, the power of big tech companies like Apple, or Google, or Microsoft, or Amazon is substantial.

Yet a company like Apple sells off 20 in two months when they've had record after record of significant growth, huge numbers, and overall have proven themselves as being able to pass on pricing pressures to consumers. So if you're a hedge fund looking for risk managed positions, your goal is to make as much money as possible while managing your risk as much as possible. And at a certain point it starts making sense to, instead of trying to focus solely on the commodity trade which got super overcrowded super fast, you start focusing on playing a turnaround on some of these de-risked massive players with huge staying power. The problem is that now that we've recovered a lot in a lot of big names and the overall market, we are simply not as de-risked as we were trading just 10 or so trading days ago because we are trading so much more expensively.

I understand a lot of people say, well, you know stocks have gone up. That means that we all feel better about the market, but actually it's a lot riskier now to buy stocks than it was just 10 days ago, even though it doesn't feel that way. And the reason is because the numbers are more expensive. In order to take on any level of risk, you have to have the appropriate risk appetite, which guess what diminishes the higher you go.

Folks who had an increase in risk appetite to buy the dip back here may not have that same risk appetite to buy it up here. Which means in other words, what satisfied markets and made them feel calm enough. Whether that's the Fed, whether that's the direction of Russia, which I don't know why people feel calm about that. Well, now, that's increasingly not going to be enough to satisfy it at these higher and higher prices.

So you think about who your core driver of prices are. It's not your mom or pop investors or your long-term holders mostly active managers and aggressive hedge fund managers specifically. And they made the conclusion this month and really, the last two weeks that it made sense to cycle back into d-risk discounted positions, largely again, primarily in big tech. That's what happened.

But now we're in a different situation. If we continue to rally in the overall market at the pace that we've seen since the 15th, you'd quickly quickly get to a breakout into a new all-time high, right? And you have to ask yourself, are hedge funds and the overall market going to make the call that it makes more sense to cycle into new all-time highs this fast during a Fed hiking cycle that has barely just started. Meanwhile, you have inflation out of control still rush out of control and all of the same risk factors that brought us down in the first place. I do think that for some managers, what makes you take illogical steps, even in an environment that's screaming risk off is that fear of missing out, but I don't see that present in this market.

Yeah, it is certainly present in micro caps and smaller spec plays, but not the broader market. I see this as a market where bears got out of hand far too quickly and markets just let them take everything because that was the environment that we were in. But now that we've closed a lot of that range and gone back towards highs, I think that there's two likely outcomes. Either the growth rate slows down and starts stagnating or the market starts dropping again.

It may not be what you want to hear, but in order for this to break out into a new high, the market really needs a big win. With one of the major risk factors, you need to either have Russia backing off or inflation needs to be cooling off and I think that you could have one of those things and that could push you to a new all-time high. But I do think for a sustainable high you probably need both. Once those are behind us, we can start focusing on a normalizing economy with interest rates that are a little bit more sustainable, and we can start thinking again about economic balances and earnings beats.

But right now we just don't have that and I think that we need a good win to really get a sustainable breakout here. That's at least my current view on what is happening. Sure, markets can be irrational longer than you can stay solvent, but at the same time I can't trust any break of resistance. All-time high resistance without one of those winning.

And with that in mind, I am looking at the market as if it is going to stagnate before it hits that all-time high and more than likely stay within the range that it's been trading at or go farther down. Anyways, folks that caps off this video, I hope you have a fantastic weekend. I want to thank Masterworks again for sponsoring us today. Make sure to check them out with the link below.

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