Are rates restrictive? And if they are – how do you know? That’s the question the Fed will address tomorrow – but it’s not easy to answer. For example, on the one hand there’s a (large) cohort who believe the Fed are falling ‘behind the curve’ – therefore increasing the odds of a recession. They feel that growth risks are to the downside – and do not need to wait for both inflation and employment data to confirm what’s ahead. On the other side of the coin – there are those who think we still run the risk of higher inflation if acting too early.
"Investing Lessons"
Is Momentum Waning? More on Why I’m Bullish Bonds into 2025
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?
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.
“Heads I Win and Tails You Lose”
After almost three decades at this game – something you learn is not to fight the tape. Trade against momentum at your own peril. Consider the news today… it was both bad and good. I will start with the (perceived) ‘good’. The Consumer Price Index (CPI) was slightly cooler than expected. And whilst it’s still a long way above the Fed’s target of 2.0% – the market was thrilled it was only up 0.3% MoM and 3.4% YoY. Bond yields plunged and stocks ripped. Sure… 3.4% isn’t great… but that’s Main Street’s problem… Wall Street doesn’t care. However, the bad news was retail sales plunged. But wait a minute – that’s also “good news” – as it could mean a more accommodative Fed. Heads I win and tails you lose.
For a full list of posts from 2017…