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Are all Negatives already Discounted by the Market?

Science of Alpha from Safety

Are all Negatives already Discounted by the Market?

Are all Negatives already Discounted by the Market?

If yes, where do the markets move from here?

Disclaimer: Any mention of company names DOES NOT mean an endorsement or recommendation to buy,
sell or hold any of these companies, sectors or the index or index-linked products. This is not investment
advice, please see the detailed disclaimer at the end of this report and at

“I have seen a lot of business cycles now. And no one predicts recessions. But in this one, everyone is predicting a recession”

--Mark Zandi, Chief Economist, Moody’s Analytics


Everyone is convinced that a recession is imminent!

There are several global macro factors which are driving people to these kinds of sentiments. The factors cited are inflation, Fed interest rate hikes, high oil prices, Russia-Ukraine war, global supply chain disruption, US-China trade war, Covid lockdowns, high commodities prices and US and global recession worries.


How the Global Macros Resulted in the Current Situation

While these are cited as a laundry list of factors, there is a relationship between them as shown in the accompanying chart. The driving events are the Covid Lockdowns, the Russia-Ukraine war and the US-China cold war. (While most are still calling it a US-China trade war, most defence analysts would likely suggest that a USChina cold war is a more appropriate term.

While the crude oil and commodity prices were already rising due to the high economic growth, the Russia-Ukraine war caused a huge spike and consistent increases up till early June.

The global supply chain was disrupted due to the Covid Lockdowns in the Asian supplier countries throughout 2020-21 and continued into 2022. While the extent of the global supply chain disruption due to the US-China cold war cannot be estimated, it cannot be denied as a very critical factor.

The heady mix of high crude oil, high commodities prices and global supply chain disruptions in strong US economy with significant buying power resulted in high inflation. Consistent high inflation for several months and quarters put pressure on the Fed.

“Don’t just sit there, do something.”, the Fed seemed to hear.

Even though, production or supply disruptions cannot be controlled or impacted through interest rate increases, the Fed was and is under pressure to be seen as doing something to bring price stability, one of its mandates. This also gave the Fed to continue its Covid-interrupted agenda from 2018-19 to bring the interest rates back to normal post the Global Financial Crisis.

Thus began the hawkish tone from the Fed and an aggressive interest rate hike path, bringing it to
normal, which it projected for the next year and a half. This brought in focus the recession worries which
were caused by Mr. Market’s price action in both equity and debt markets.

When the security prices go down, Mr. Market starts forecasting negative fundamentals, in most
cases, irrationally.

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Are all Negatives already Discounted by the Market?


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