Blog: Markets Turn Fragile Like a Bomb, not a Flower
It's not just a political regime shift.
It was quite a week. The market went sideways going into the mid-term US elections. On Wednesday, when the results of the election were known, the market rallied strongly. However, the rally was not a celebration of the victory of one party over the other. Instead it was likely relief that the election went off without disruption. There had been fear that the election results would be disputed. There was even the possibility violence at the polls, or coercion. None of that happened. The election went off smoothly, and the results were so decisive that they could not be disputed. With that uncertainty gone, the market rallied.
On Thursday, however, the potential impact on markets came to the forefront. The incoming US Congress will be less favorably inclined towards both crypto and AI. In particular, AI data centers. And it's not just the Congress. There was also a sea change at the state level. Votors backed gubernatorial candidates who have been critical of the rise of data centers. These states include Texas, Ohio and Georgia. Data center bans were passed by many towns. Polls showed strong anti-data center sentiment among voters. Since the S&P 500 is now 38% weighted towards tech companies, the selling was brutal on Thursday. Equity risk measures soared. While there was a small rebound on Friday, risk measures remained elevated. As I said last week, that was the one remaining brick we needed to shift regimes.
The Market State Uncertainty Indicator (MUSI) shifted to a Fragile state. But what does the it mean when I say the market is Fragile? How is that different than Turbulent?