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Put Away Your Saber

Updated: Jul 20, 2023

Skeptics of this recent market are clearly getting frustrated. From my perspective, this is the most hated rally I have seen on Wall Street in a long time.


The tale of the tape is that it currently takes a whole lot more bad news to make the market go down than it takes good news to make the market go up. Depressed sentiment, positioning and liquidity have recently— and, in our view, temporarily-- been winning the tug of war versus depressed macroeconomic fundamentals.


As a reminder, the Nasdaq 100 has been ridiculously bullish on recent Fed days:


· July 27: +4.3%

· June 15: +2.49%

· May 4: +3.41%

· March 16: +3.7%


There's just one thing... the market gave it all back the following day every single time until last week when Amazon’s (AMZN) earnings came to the rescue. I’m grateful for the relief provided to the market by Amazon. However, Wal Mart (WMT), Google (GOOGL) and Microsoft (MSFT) all missed on the top and bottom line, so I’m not sabering my champagne bottles just yet.


However, based on this week’s reaction to large cap technology company earnings and the FOMC decision, it may turn out that I have been overly pessimistic about Q3. I guess we’ll see. I definitely don’t think that peak inflation is actually here yet, yet bonds led the way last week in declaring that the top is in for aggressive central bank tightening. Global bonds are set for their best monthly gain since 2020, bouncing back from a record slump in the first half of 2022.


It's very interesting to see risk-on assets (namely stocks) do well at the same time as risk-off assets (such as bonds), and that is exactly what happened last week. Conversely, risk-on assets and risk-off assets have both done poorly over the first half of the year, which was part of the reason we started calling for a recession so many months ago. That weirdness went next-level last week with stocks, bonds, crypto, gold, and just about any given commodity all surging higher.


The surge in commodity prices indicates that inflation is far from over, and I would point to the absurdly tight labor market as the reason for that. It seems pretty simple-- with unemployment at 3.6% and annual inflation at 9.1%, something has to give.


Also, this is not your grandma’s Fed. Investors have come to understand that there’s a government bias to stimulating the economy and keeping interest rates abnormally low, regardless of the consequences. Not surprisingly, the bond market has sniffed that out; it has priced in a dramatic rate-cutting cycle starting in Q1 2023, which is insane.


(Of course, Wall Street sees that as just fine because it has a name for financial-asset inflation-- it’s called a “bull market.”)

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Ukraine’s bonds were downgraded by S&P on Friday from CC+ to CC, with a negative outlook. “As a result of this proposal, we believe a default on the sovereign’s foreign currency debt is a virtual certainty,” S&P said in a Friday statement.


I wonder who’s going to pay for that?

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We see it as somewhat likely that investors will now chase stocks into a ramping market, at least until such time as Fed Chairman Powell realizes what he has done and puts another lid on things, thereby sending the S&P to its previous lows. …Or perhaps even new ones.


August has been the worst performing month for the S&P 500 (-0.39%) with September not far behind (-0.19%). We believe investors should look to inflation and potential shifts in the Fed’s stance to find the current market’s bottom.


In the current environment, we favor pro-inflation assets such as commodities, commodity-related countries, energy, materials, and industrials.


The energy sector in the U.S. not only offers favorable dividend yields but is also the most favored sector by Wall Street analysts for long-term growth, with a consensus earnings estimate that’s now almost twice as high as the tech sector’s growth rate. The environmentalist in me hates it, but let’s put it this way, several of the world’s largest oil companies reported earnings last week, and I didn’t hear a single blip about foreign exchange problems.


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Watch the ships.





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