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Why Is it Different This Time?
Whenever history looks like repeating – it’s worth asking what’s different this time? I say that because the past is never a guarantee of what’s ahead. Put another way, if you are making decisions on that basis, you might be suffering from “confirmation bias”. And that can be a blind spot. My (possible) blind spot is I think a recession is more than likely within the next 12 months. As such, I am only willing to put about 65% of my portfolio in risk assets. If I felt a recession was not likely – I would meaningfully increase my exposure. My bias is to lean into historical data (and leading indicators) which have reliably predicted recessions in the past. That feels logical. But I could be wrong.
S&P 500 Meets Resistance
There’s a few good reasons to be bullish: (i) Q1 earnings were better than feared; (ii) Bank deposits have stabilized; (iii) Inflation is slowly (but surely) working its way down; (iv) The Fed is closer to its terminal rate; and (v) We’re yet to see any major deterioration in credit. All of those are positives for risk assets. However, stocks have run a long way fast and are due to take a pause. I think that’s what we will see…
Hints of Mid-2007
It’s been said that whilst history doesn’t repeat – it often rhymes. For me, 2023 offers some parallels to 2007. To be clear, things are not exactly the same (they rarely are) – however I will demonstrate some similarities. What’s more, I continue to remain long this market (with about 65% exposure). That said, if I’m correct (and I may not be) – it could raise a ‘red flag’ for 2024. Three things (1) fed monetary tightening takes between 12 and 24 months to make its full impact; (2) the economy also looked very strong into Q4 2007; and (3) sustained inverted yield curve cause recessions. In my view – the market is losing sight of the fact of how long the lag effect can be.
Do Ya Feel Lucky… Punk?
“You’ve got to ask yourself one question: ‘Do I feel lucky?’ Well, do ya, punk?” – Dirty Harry. In Callahan’s case, there might have been just one… maybe two… left in the chamber. Were you willing to take that chance? Sure, Powell delivered what the market expected. However, he reminded us there’s still more ‘lead in the Magnum 44’. The other day I shared how the market has already priced in a 60% probability for a hike in July. That probability remains unchanged after Powell gave his address. However, beyond July, the market is not expecting any. Remember – only a few weeks ago – the market felt that rate cuts were still possible this year. So… do you feel lucky?