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What Don’t We Know?
There are some things we know to be (mostly) true. Inflation is coming down. The Fed is closer to the end of its aggressive rate hikes. Growth is slowing. And earnings are likely to decline in Q1 (after a decline in Q4). But what don’t we know? What are the potential unknowns that could trip the market up? Three things to consider.
Yields Plunge – The Signal It’s Sending
Bond yields are falling. And fast. The question is why? In short, the bond market is now pricing in a recession. It sees growth stalling… and believes the Fed will embark on rate cuts in the second half. But have equities got the memo? Not yet. They are trading at close to 19x forward earnings… as big tech drags it higher. From mine, I think the market feels vulnerable here.
Oil: Headed Back to $100?
November last year I felt there could be an oil supply shock in 2023 – sending the price back over $100. This week OPEC+ surprised the market by announcing cuts of 3.7M barrels of oil per day – around 4% of global supply. The price of WTI surged back above $80. I think we go higher from here… which won’t help Jay Powell’s fight with inflation.
A Great Quarter… Can it Continue?
The S&P 500 recorded an impressive gain of ~7% for the first quarter. Optimistic on the resolution of the banking crisis – and prospects of Fed rate cuts in the second half – the bulls have regained their mojo. But this raises a question: why would the Fed cut rates? It’s not because inflation is under control. For example, could it be because the economy needs assistance? Stress in the financial system? A credit event? If so, is that a good thing? Here I also look at the monthly chart – it deserves our attention.