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From our August 9th morning note:
"...given that present Fed policy, amid a generally weakening macro backdrop, remains in tightening mode (with QT set to double next month) — odds that the latest (short-covering and gamma-hedging) rally will fail and give way to, at a minimum, a test of the bear market lows remain elevated.
But what if we don’t actually enter recession? Won’t corporate earnings indeed hold up, supporting a new bull market trend going forward?
We've spent a lot of time herein over recent weeks on positioning dynamics under the market's surface that help explain how a rally in stocks can gain some serious steam directly in the face of some serious fundamental headwinds.
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Below are snips from yesterday interviews with two Fed governors whose comments simply don't jibe with what the equity market appears to be pricing in of late. Suggesting perhaps that "the market" (traders in the aggregate) believes that the economy will contract to the point that it'll stay the Fed's hand before they break something, that inflation, in a weakening environment, will careen back to their 2% target, and that corporate profits will not decline as they typically do during economic contractions.
For whatever reason(s), perhaps something about the present political/geopolitical environment, or that of the past several years, or of the past several decades for that matter -- or, more likely, my still feeling a bit foggy as my covid symptoms fade (i.e., going easy on myself this morning) -- today's note will feature an essay I penned several years ago and feel compelled to share again this morning
Enjoy (and please pardon my cynicism):
In yesterday's note I featured the previous evening's entry to our internal market log. In it I made the following assertions:
8/22/2022
The Chicago Fed Nat’l Activity Index (an input to our PWA Index) for July was released today, and it surprised to the upside – scoring a +.27 vs a -.25 for June. A further contraction was expected…
While there'll be lots of data to parse this week, the ultimate market mover -- one might surmise -- will be J. Powell's speech in Jackson Hole on Friday.
Thus, my voice simply won't have it when it comes to recording this week's economic and stock market snapshot video. I was, however, able to score our index and update our charts enough to develop some share-worthy assumptions.
As you've no doubt gathered from the recent messaging herein and, especially, on the videos, we see odds favoring (but never guaranteeing, mind you) yet another leg lower for the current bear market.
Correction, at the 7:54 mark I said "oversold", meant "overbought."
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This week has been virtually all about inflation. As we suggested (i.e., the obvious), inflation was clearly peaking, leaving only the question of speed and magnitude of the coming deceleration. Keep in mind PWA is firmly in the structurally-higher inflation camp going forward.
Here's yesterday's "Charts of the Day:"
Interesting, while equities are partying this morning (as we expected, at least initially, if inflation came in under expectations), long-term treasury prices (first chart), after an initial surge, seem to have a different take (they will drop when long-term inflation expectations increase), as do inflation swap spreads (they will rise when inflation expectations increase [2, 5 and 10-yr featured])... Hmm....
8/10/2022
The SP500 has seen an impressive ramp back to 4,200, on really strong breadth, no less. One might conclude that this is the makings of a new bull market.
Interesting, while equities are partying this morning (as we expected, at least initially, if inflation came in under expectations), long-term treasury prices (first chart), after an initial surge, seem to have a different take (they will drop when long-term inflation expectations increase), as do inflation swap spreads (they will rise when inflation expectations increase [2, 5 and 10-yr featured])... Hmm....
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8/8/2022
Oil looks interesting here after the recent comedown. Brazil looks historically attractive going forward. Metals and miners are poised to be high-probability winners for years to come. And while we can argue on behalf of a strong dollar persisting a bit longer, the setup, in my view, for the next several years lends itself to an on-balance weakening trend. Hence, cheaper and higher yielding (than US) non-US (EM in particular) equities in general look long-term relatively attractive going forward.
Per our latest video commentaries, the resiliency in equities of late smacks more of positioning than it does some sustainable sea change that would have us turning net bullish on the market's go-forward prospects from here.
In this morning's video I mentioned that today's rally off the lows, amid what had to be -- based on the character of the recent rally -- the last thing the bulls would've wished for (today's employment report), could've to no small degree been the result of some serious short-covering. If, that is, it didn't all get taken out during last week's rally.
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"Don't fight the Fed" has been the market mantra for as long as no doubt many a trader can remember. I.e., you may see nothing but dread when you look out across the macro horizon, but if the Fed's easing (cutting interest rates and purchasing bonds) buy stocks, with both fists!
You may have noticed that, when I suggest that inflation is coming off the boil, I often make it a point to remind the reader that we are structurally bullish on inflation over the long-term from here.
I.e., nothing with regard to our thesis has changed since I penned the following back on May 7th of this year:
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