Bonds Realign with the Fed… Not Equities

From the first week of 2023 - bond markets were at odds with the Fed. For example, yields on the 2-year treasury plunged from 4.50% to barely above 4.0% over the past 6 weeks. And yet - the Fed were resolute in their resolve to keep raising rates. Something was amiss. Turns out that bond markets have pivoted and now see 'eye-to-eye' with the Fed that rates are staying higher for longer. Go figure. However, equities are yet to get the memo.... that's risky.

S&P 500: ‘False Break’ Warns of Pullback

This week the S&P 500 performed a 'false break' of its previous 4100 high. Technicians see this as a reliable reversal signal. However, on the other hand, there are bullish arguments we can make. The mix of bullish and bearish technical signals make shorter-term 'tactical' trading very difficult (that's not my game). Here's how I'm thinking about it...

Bonds React to “Higher for Longer“

Bond markets (and the US dollar) appear to be reacting to the likelihood the Fed has 'more work to do' on bringing inflation down to its 2.0% target. For e.g., the US 2-year treasury has surged almost 50 bps the past couple of weeks on stronger than expected economic data (eg surging jobs and higher wages). Meanwhile, JP Morgan's CEO - Jamie Dimon - said it's too early to declare victory on inflation. What does this mean for stocks?

Market Refuses to Believe the Fed

The S&P 500 is optimistic on three things (a) avoiding a recession; (b) rapidly falling inflation; and (c) two rate cuts before the end of the year. And the market could be right. However, I think it's optimistic. What's more, they are choosing to fight the Fed.

Powell Leans Dovish – Sending Stocks Higher

The market was worried about an overly hawkish Fed heading into the Feb FOMC meeting. However, Fed Chair Powell appeared to lean the other way... hinting at dovish tones. New language like 'disinflation' were introduced... suggesting the cash rate may not need to get to 5.0%. It didn't take much for stocks to rally as a result...

Bear Market Rally? Or Something More?

About 100 of the 500 S&P companies have reported Q4 2022 earnings. TL;DR is they are 'average' at best. Most have barely met already lowered expectations. What's more, forward guidance is weak. However, the bulls are betting on inflation continuing to plunge forcing the Fed to cut rates later in the year. I'm not yet prepared to support that thesis... with services inflation still running at 5.2%. There are some signs things are improving.

Remain Wary of Permabears

Jeremy Grantham is a well known permabear. This week - he called for a possible 50% correction. Sure... it's probable we see something in the realm of 20%... but 50%? I decided to look at Grantham's track record against the S&P 500 over 25 years. Guess what - he has woefully underperformed the market. Hardly surprising. Beware of doomsday 'crash callers' like Grantham... and he is not alone. They are dangerous.

Thinking Through Both the Bull & Bear Case

Are you a bull or a bear? That answer will largely depend on your timeframe. However, there are solid arguments for both the bull and bear case in the near term (next 12 months). This post looks at each and why I still lean bearish in the near-term. However, I will treat any meaningful dip (eg 10%) as a buying opportunity.

Is Bad News finally Bad News?

Soft landing? That's the market consensus. I am not buying it. For example, retail data for December was horrible - it's third straight month of declines. Are US consumers tapped out? Their savings rates are now at all time lows? Keep your eye on credit quality - how is that looking?

Peeling the Inflation Onion

Fed President John Williams uses the analogy of an onion when describing inflation. For example, the outer most layer consists of commodities. The middle layers consists of goods. However, the inner most layer - its core - consists of services. And it's services inflation which generates inflation inertia. And that's the mechanic which the Fed are exclusively focused on...

December CPI – The Good and the Bad

There was a little of something for the bulls and the bears with December's monthly inflation report. On the surface, inflation is coming down. However, if we look underneath the hood, most of that inflation is goods. Services inflation however remains doggedly high (i.e. wages). And whilst goods inflation could fall to "zero" - if services inflation remains twice the Fed's 2.0% objective - they will continue to tighten (even if that means simply holding rates at a higher level)

It’s Earnings Season – Will They Meet Expectations? 

Earnings seasons starts this week (Friday) with the banks. Across all sectors - analysts expect earnings to expand by 4% in 2023 - or around $230 per share for the S&P 500. If we don't experience a recession - this feels probable. However, that's the question - are we likely to experience a contraction? If so, it's most unlikely we will see expansion - which implies the S&P 500 feels expensive around 4100.