Tuesday, March 26, 2024

Morning Note: All Things Equal?

There's essentially very little to add this morning to our last two video commentaries.

In a nutshell:

1. Fed Chair Powell is comfortable setting market expectations at 3 rate cuts this year -- in essence dismissing the latest inflation data -- no longer, for the moment, concerned with an early 80s repeat... I will, however, add that not all on his team are on board, as we'll likely hear from some select commentary this week.

2. The economic data are improving, particularly in the manufacturing space -- notably reducing the odds of near-term recession -- i.e., likely, at a minimum, pushing the start-date further out.

3. Equity market technicals, and sentiment, point to increasing odds of an equity market pullback sometime over the next few weeks.

4. Given reduced recession odds, and an on-balance accommodative Fed, all things equal, odds would favor a buying of any decent near-term dip in equities.

5. #4 notwithstanding, there is large leverage (in the derivatives space in particular) underpinning these levels, which means a cracking of certain levels to the downside could indeed spark something far more meaningful than simply a buyable dip... That said -- and, again, all things equal -- odds favor #4.

6. We nevertheless -- given certain elements of the overall setup (present macro dynamics, risks highlighted above, historically high valuations) -- need to accommodate (via liquidity, diversification, and hedging) for the fact that, in markets, all things are indeed not always equal.

In case you missed them:

So What's Motivating the Fed Right Here? And What's Gold Signaling? (video)

Asian equities were mostly green overnight, with 10 of the 16 markets we track closing higher.

Same for Europe so far this morning, with 13 of the 19 bourses we follow trading up as I type.

US equity averages are higher to start the session: Dow by 35 points (0.09%), SP500 up 0.30%, SP500 Equal Weight up 0.31%, Nasdaq 100 up 0.50%, Nasdaq Comp up 0.49%, Russell 2000 up 0.45%.

This morning the VIX sits at 12.98.

Oil futures are down 0.22%, nat gas futures are down 0.06%, gold's up 0.48%, silver's down 0.60, copper futures are down 0.40% and the ag complex (DBA) is up 0.10%.

The 10-year treasury is down (yield up) and the dollar is down 0.04%.

Among our 36 core positions (excluding options hedges, cash and money market funds), 28 -- led by GDX (gold miners), FEZ (Eurozone equities), PDBA (ag futures), GLD (gold) and Range Resources -- are in the green so far this morning... The losers are being led lower by XLE (energy stocks), XME (base metals miners), SLV (silver), EIDO (Indonesia equities) and DEM (emerging mkt equities).

This sounds troublingly familiar:
"The 1929 boom was, in fact, quite a narrow and selective one. It was a boom of the handful of stocks that figured in the daily calculation of the Dow Jones and New York Times indices, and that was why those well-publicized indexes were at record highs. It was also a boom of the most actively traded stocks bearing the names of the most celebrated companies, the stocks mentioned daily by the newspapers and millions of times by the board room habituĂ©s – and that was why it was constantly talked about. But it was emphatically not a boom of secondary stocks in which perhaps as many investors were interested."

– John Brooks, Once in Golconda, 1969

As does this:

"The market is in a two-tier frenzy between the ‘new economy’ stocks and the ‘old economy’ stocks. Anyone who has studied the concept-stock mania of 1968-69, or the ‘Nifty Fifty’ mania of 1972 has to be getting chills here. We’ve seen two-tiered markets before: most prominently in 1929, 1968-69, and 1972. The inconvenient fact is that valuation ultimately matters. That has led to the rather peculiar risk projections that have appeared in this letter in recent months. Trend uniformity helps to postpone that reality, but in the end, there it is. Given current conditions, it is increasingly likely that valuations will begin to matter with a vengeance."

– John P. Hussman, Ph.D., March 7, 2000

Have a great day!

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