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A Rational Response or Pavlov’s Dog?
Market consensus is for a soft-landing with at least three rate cuts next year. The market does not expect a recession.This may prove correct (I don’t pretend to know) – but there are some chinks in the armor. Readers will know I don’t subscribe to a soft-landing. Typically in the lead up to a recession – spectators will generally lean towards it being “soft”. Few ever forecast ‘hard landings’. For example, if you have unemployment below 4% and positive GDP growth – it’s hard to see anything else. But very rarely do things land softly. We’ve seen one over the past five decades. That’s not a high ratio. What’s more, soft landings are exceptionally rare after 550 basis points of rate hikes (not to mention over $1 Trillion in quantitative tightening – of which we have no parallel).
People Choose What They Want to Hear
Markets continue their ascent after a blistering November. The Dow and S&P 500 each gained ~9% for the month – in what is typically a seasonally strong time of year. From a year-to-date perspective, the Dow is up 8.5%, the S&P 500 is up ~19% and the Nasdaq up over 35%. The anomaly? 493 of the 500 stocks on the S&P 500 are barely positive for the year (i.e., the equal weighted index). So what’s driving the optimism? Simple: the expectation of lower yields and the Fed hitting its terminal rate. This post looks at potential blind spots for the market.
Charlie: More than a Brilliant Investor
“The best thing a human being can do is to help another human being know more” – Charlie Munger. Very few things will change your trajectory in life (and/or business) as much as learning and education.The more you dedicate your time to obtaining knowledge – the better you will be. But take it a step further… the pathway your life takes will be a function of the decisions you make. Which begs the question – how does one make higher-quality decisions and/or fewer mistakes? Charlie Munger offered us a framework of mental models to do just that… this will be his real legacy.
Cautious… But Invested
It’s a brave person who is short the market. Probabilities suggest we are headed higher in the near-term. For example, previous episodes of Fed pausing suggests stocks typically gain. My sentiment today is best described as ‘cautious… but invested’. To that end, one should always be invested to some extent. And whilst it’s always unwise to be completely remiss of the risks — it would be an even greater mistake not to have some exposure to higher quality risk assets and fixed income (at current yields)