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Bye Bye Sugar High
Are equities finally connecting the dots? Maybe. Whilst this has been a difficult market to trade – my sense was to approach with caution. From mine, there were too many open questions. For example, when the market was trading around 4600 – my sentiment was the downside risk outweighed any upside reward. We are now ~8% lower… closer to the zone of where I felt the S&P 500 could trade. In short, valuations were stretched. Put another way, the risk premium for owning stocks wasn’t there. But markets pushed higher – taunting the Fed on their “higher for longer” script.
The Battle-lines are Drawn
Here’s today’s question: do you think 18.3x forward earnings is a good risk/reward bet? For me, the answer is no. And I say this because investors have a very compelling alternative. We don’t need to look any further than bond yields. For example, the 12-month US treasury yield offers investors 5.45%
Fed: We’re Not Finished Hiking
Let’s start with a quick quote from yesterday’s missive: “From mine, Powell will deliver a hawkish tone leaving the door wide open for further hikes in November or December if needed”. That’s exactly what he said. From my lens, Powell sounded hawkish today – reminding investors they are are not done hiking. Not yet. And if I’m to be blunt – he has sounded hawkish at every meeting this year. But investors will often choose to hear what they want to hear. Be conscious of what biases you have. The script is higher for longer and the market is yet to adjust. It will.
Fed Trying to Thread a Narrow Needle
Tomorrow we will hear from the Fed. It’s very unlikely the world’s most influential central bank will raise rates this month. However, it’s my view Jay Powell is not about to drop any dovish hints. Remember: just because they may be closer to the end of rate hikes – that doesn’t mean they are about to cut. Rate cuts are dovish. However, rates staying higher for longer is hawkish. And as inflation comes down, this means real rates are rising (with the Fed on hold). From mine, we hear a hawkish Fed tomorrow. And the market has not priced that in.