As part yesterday’s missive – I talked to why I think bond yields are too high. For example, I offered a chart showing the declining trend in nominal GDP growth vs what we see with the US 10-year yield. Economic growth is clearly slowing and yet yields are going the opposite way. Why? Therefore, investors should ask themselves what is the catalyst which will take us back to a 3.0% ‘growth’ mode (i.e. what we saw over Q3 and Q4 of 2023)? For example, is it the consumer? They make up ~70% of GDP with consumption – however they are mostly tapped out (as we have heard in the latest earnings reports). What will it be?
"Interest Rates / Bonds"
Rate Cut Hopes for 2024 Start to Fade
Just as market participants were starting to get hopeful rate cuts could be coming – that door was slammed shut. Yields surged opposite a stronger-than-expected monthly payrolls number. Heading into the print – the market was looking for softness in the labor market – with maybe 190K jobs added. Recent data had suggested jobs were slowing – paving the way for the Fed to cut rates as early as July (with a 70% chance assigned to September). As it turns out, monthly job gains were said to be 272,000. That said, there are some ambiguities with the report – with the unemployment rate jumping to 4.0%. Is Sahm’s Rule about to trigger in the coming months?
When the Laws of Probability are Forgotten
Whilst the S&P 500 posted a negative week – it was a strong month for equities. The world’s largest Index managed to add 4.8% for the month – hitting an intra-month record high of 5339. That’s four of five winning months to start 2024. Perhaps completely enamored by all things AI (more on this in my conclusion) – investors basically shrugged off sharply higher yields and a series of disappointing inflation prints to push prices higher. What could go wrong? At the end of every month – it pays to extend our time horizon to the (less noisy) monthly chart. And whilst the weekly chart is useful – it tends to whip around. Longer-term trends (and perhaps investments) are often better examined using this lens.
For Now… Bad News is Still Good News
Never confuse the stock market for the economy. They are two very different things. And whilst there are times when the two will trade in unison – there are also plenty of occasions when they diverge. Now is possibly the latter. For example, this week we had a plethora of ‘less than positive’ economic news. But it didn’t stop the market surging back to near record highs. Why? Every bit of bad (or soft) economic news is a step closer for the Fed to lower rates.
For a full list of posts from 2017…