Stock Market Down Even as Oil Keeps Falling: What's the Problem? Beware the Fed, Says Ilya Spivak

Key Concepts

• Negative Divergence: A technical analysis signal where an asset's price makes a new high, but an oscillator (like RSI) fails to confirm, suggesting weakening momentum.
• Cost-Push vs. Demand-Pull Inflation: Cost-push is driven by supply-side shocks (e.g., oil prices), while demand-pull is driven by excessive economic activity.
• Structural Higher Rate Environment: The belief that inflation has become embedded, necessitating sustained high interest rates regardless of temporary geopolitical relief.
• Demand Destruction: A reduction in the consumption of a commodity (like automotive parts) caused by high prices or economic stress.
• Pro-cyclical Inflation: Inflation that rises in tandem with economic growth, suggesting an overheating economy.

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1. Market Sentiment and Technical Analysis

The market is currently experiencing a "pause" despite optimism surrounding a potential US-Iran peace deal.

• S&P 500 Analysis: The index has returned to the June swing high, but momentum is fading. The speaker highlights a "negative divergence" on the RSI indicator, where the price is nominally higher, but the oscillator is lower, signaling a lack of conviction in the rally.
• Asset Correlations: While crude oil prices are falling (reducing the geopolitical risk premium), other markets are not following suit with the same enthusiasm. Gold and bonds remain under pressure, suggesting that the market is not fully buying into the "peace dividend."

2. The "Inflationary Scarring" Thesis

The central argument is that while the geopolitical risk of the war may be receding, the inflationary scarring remains.

• Bond Market: The 10-year Treasury futures (ZN) show a persistent downtrend. Because bond prices move inversely to yields, the continued sell-off in bonds indicates that the market expects interest rates to remain high.
• The Dollar: The US Dollar has maintained its strength, pulling back only halfway from its wartime highs before reasserting an upward trend. This confirms that the market views the current economic environment as structurally inflationary.

3. Monetary Policy and Fed Expectations

The speaker notes a dramatic shift in central bank policy globally, specifically regarding the Federal Reserve.

• Fed Outlook: At the start of the year, the market expected 50 basis points in cuts. Now, there is an ~80% aggregate probability of at least one rate hike by the December meeting.
• The "Overheating" Economy: The speaker argues that the Fed is not just reacting to the oil shock, but to an economy that is "spinning really quickly to go not very fast at all."
• GDP Composition: While headline GDP growth is moderate, business investment (specifically in data centers) is surging at 10.4%, while consumer spending—which makes up 68% of the economy—is lagging. This suggests an economy overheating under the surface, contributing to "stickier" core services inflation.

4. Strategic Positioning

Based on the analysis that the Fed will likely maintain a hawkish stance despite the potential for a peace deal, the speaker outlines the following positions:

• US Dollar: Long (Shorting the AUD, GBP, and EUR via micro futures).
• Equities: Risk-off view (Short call verticals in QQQ and SPY).
• Rates: Short bonds (Long the yield side, holding puts on the middle and long end of the curve, e.g., TLT).
• Commodities: Long natural gas (via call verticals), anticipating continued inflationary pressure from energy drivers.

5. Notable Quotes

• "The upshot here seems to be that while you may have fixed some degree of geopolitical risk... what you've not fixed is the inflationary scarring from the oil shock."
• "The economy is sort of overheating under the surface. The headline numbers may be relatively moderate, but it is as though the economy is spinning really quickly to go not very fast at all."

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Synthesis/Conclusion

The market's exuberant reaction to the US-Iran peace deal is likely premature. While the immediate geopolitical risk premium is being removed from crude oil, the underlying economic data—characterized by sticky core inflation, a shift in Fed policy toward rate hikes, and an economy that is investment-heavy but consumption-weak—suggests that the "war-induced" inflationary environment is now structural. Investors should prepare for a "higher-for-longer" interest rate environment, as the Fed is expected to prioritize inflation control over the temporary relief provided by geopolitical de-escalation.