adriant

adriant

  • Joined: December 24, 2025
  • Articles: 503

Fed Minutes Suggest More Hikes 

Today the Fed released this statement from their latest minutes "The economy was facing headwinds from tighter credit conditions, including higher interest rates, for households and businesses, which would likely weigh on economic activity, hiring, and inflation, although the extent of these effect remained uncertain". But here's the thing: the market could be underestimating how long the lag effect is. Typically it's between 12 and 24 months. However, with an extra $2+ Trillion in (perhaps wasteful) government handouts, that has softened the blow dealt from higher rates. But make no mistake - the lag effects from 500 bps of tightening will come - it's just longer than expected.

‘Higher for Longer’ after May Core PCE

May's print for Core PCE came in 4.6% YoY - still well above the Fed's objective of 2.0%. However, mainstream were quick to label the report as 'lackluster'. Why? Here's the thing - Core PCE has hardly changed the past few months. It dipped in May to 4.62%, from April (4.68%), but was above March (4.61%), and was exactly where it had been in December (4.62%). Put another way - we have made no ground since December - and yet it was now somehow 'lackluster'. But it gets better: core services inflation (without energy services) rose by 5.4% in May YoY. It was fractionally lower than April (5.5%) - but equal to what we see in both March and December (5.4%). Similar to Core PCE - it too is stuck in a tight range for 5 consecutive months. What does all this mean? Simple: rates will be higher for longer and markets don't get it.

Stocks Are Not Cheap

The S&P 500 has had a fantastic first 6 months of the year - up almost 15%. That's a welcomed relief from the miserable 2022. But are stocks now too expensive? What's the premium investors are being asked to pay? There are a couple of ways we can assess this. For example, we can compare the earnings yield against the risk free rate of return (currently around 5.5% and going up). And whilst it's always good to maintain some (long) exposure to the market - we need think carefully about how much (and where)

Why Is it Different This Time?

Whenever history looks like repeating - it's worth asking what's different this time? I say that because the past is never a guarantee of what's ahead. Put another way, if you are making decisions on that basis, you might be suffering from "confirmation bias". And that can be a blind spot. My (possible) blind spot is I think a recession is more than likely within the next 12 months. As such, I am only willing to put about 65% of my portfolio in risk assets. If I felt a recession was not likely - I would meaningfully increase my exposure. My bias is to lean into historical data (and leading indicators) which have reliably predicted recessions in the past. That feels logical. But I could be wrong.

S&P 500 Meets Resistance

There's a few good reasons to be bullish: (i) Q1 earnings were better than feared; (ii) Bank deposits have stabilized; (iii) Inflation is slowly (but surely) working its way down; (iv) The Fed is closer to its terminal rate; and (v) We're yet to see any major deterioration in credit. All of those are positives for risk assets. However, stocks have run a long way fast and are due to take a pause. I think that's what we will see...

Hints of Mid-2007

It's been said that whilst history doesn't repeat - it often rhymes. For me, 2023 offers some parallels to 2007. To be clear, things are not exactly the same (they rarely are) - however I will demonstrate some similarities. What's more, I continue to remain long this market (with about 65% exposure). That said, if I'm correct (and I may not be) - it could raise a 'red flag' for 2024. Three things (1) fed monetary tightening takes between 12 and 24 months to make its full impact; (2) the economy also looked very strong into Q4 2007; and (3) sustained inverted yield curve cause recessions. In my view - the market is losing sight of the fact of how long the lag effect can be.

Do Ya Feel Lucky… Punk?

"You've got to ask yourself one question: 'Do I feel lucky?' Well, do ya, punk?" - Dirty Harry. In Callahan's case, there might have been just one... maybe two... left in the chamber. Were you willing to take that chance? Sure, Powell delivered what the market expected. However, he reminded us there's still more 'lead in the Magnum 44'. The other day I shared how the market has already priced in a 60% probability for a hike in July. That probability remains unchanged after Powell gave his address. However, beyond July, the market is not expecting any. Remember - only a few weeks ago - the market felt that rate cuts were still possible this year. So... do you feel lucky?

Skip, Pause, Hike or Pivot

It's Fed week. What will the world's most watched central bank do? A surprise hike like Canada and Australia? Unlikely. Maybe time to hit the pause button and take a look around? That's what markets are pricing in. Or will this be a 'hawkish skip' implying their work is not yet done? From mine, if we see Core CPI anything above 5.0% this week - the Fed will tell us their work is not done. Here's the thing: markets are trading back at levels before the Fed commenced their 500 bps of rate hikes. What's more, we find Core PCE still above 5.0%; unemployment well below 4.0%; and wage inflation above 4.0%? What is to stop the Fed from finishing the job? Whilst they are likely to pause - there are more hikes ahead

Bulls & Bears Can Make a Solid Case

It's fair to say this is one of the more hated stock market rallies. Why? Rarely have I seen so many caught on the wrong side of the trade. Sentiment is overwhelmingly negative. And yet the S&P 500 is up ~20% from its October low. This missive outlines both the bull and bear case. Either side can make valid arguments. This is what makes things so interesting. In short, you must have exposure to this market. However, you should do so with your eyes wide open.

Bond Market Agrees with the Fed

Two months ago - the bond market was at odds with the Fed. Fixed income markets felt the Fed were going to be forced to cut rates as many as three times this year. For e.g., the gap between the US 2-yr yield and the Fed funds rate was in excess of 100 basis points. At the time I questioned who would be right? Bonds or the Fed? Fast forward to today and the gap has closed considerably... bonds have now realigned with the Fed's way of thinking; i.e. expect higher for longer