With the Fed seemingly on pause and bond yields sharply off their highs – markets are optimistic. Equities have surged the past few weeks – up around 17.6% year-to-date. The S&P 500 added 10% in just 3 weeks! The narrative (as far as I can tell) is we’re headed for “soft landing”. But can we be so sure? Past experience suggests a “hard landing” is the more likely outcome. And absent other evidence, when the Fed hikes this much (and especially this fast) – we should expect one.
Are Bond Yields and Oil Cracking?
Today was an important day in the bond market. The US Treasury auctioned $40B of 10-Year notes. Coming into the auction – I was worried there would not be a decent bid. For example, if we faced further buyer’s strike – these yields were likely to resume their path higher. However, we saw the opposite. The 10-year yield drifted lower. So what does this tell us about future economic growth? Are investors worried? In addition, the price of WTI Crude is also sharply lower… back below US$80/bbl on concerns of weakening demand. Are equities slow to connect the dots – as they are headed in the opposite direction.
For Now, A Slowing Economy is Good News
A weaker than expected October payrolls print sent stocks flying and bond yields sharply lower. The S&P 500 finished at 4358 – a whopping 5.9% for the week. It was the market’s best week for the year. Renewed bullish enthusiasm was mostly due to investors betting the Fed is done. And that makes sense. For example, if employment, growth and inflation continue to soften – there’s every possibility the Fed has hit its terminal rate. However there is a caveat. Not only will the Fed need softer economic data – they are hoping the bond market continues to keep financial conditions tight (i.e. bond yields stay high)
Are Recession Callers Back-peddling?
It’s the rally everyone loves to hate. Why? Because very few got it right. Most fund managers missed this rally entirely… thinking it was only a matter of time before things collapsed. The thing is – they haven’t. I will admit – I also got this wrong. My initial target at the start of the year was 4200. If that broke – I was looking at resistance around 4500. The S&P 500 now trades 4536 – making me look foolish (and it won’t be the last time I am sure). We’re now just past the mid-point of the year – with the S&P 500 up 18.2% YTD. Remarkable by any measure. What are Wall St saying about the second half?
For a full list of posts from 2017…