Ghosts of 2022

As I've stated aplenty herein in writing and in the videos of late, we remain constructive on equities, but with a relatively short window of confidence -- that being into late this year/early next... The ultimate headwind that we've assigned high odds of developing is precisely the one that is troubling markets as I type this morning.

In a nutshell, our view in January was that when we add up record tax refunds, a recession-level budget deficit (huge net govt spending), a new Fed chair who's appointment would come with some serious strings attached, and whatever else an administration heading toward a mid-term election can conjure up to make voters happy -- well, sure, that "should" be a recipe for higher equity prices in 2026.

On Fed Incentives, And Your Complete (and Important) Weekly Macro Rundown

According to macro analyst, liquidity expert and research provider Michael Howell in this week's Macrovoices podcast, the odds of the fed hiking interest rates relatively soon are exceedingly high... As you'll see in the following, I don't entirely sympathize.

He cites the predictive ability of 2-year treasury yields: 

"It's correct 85% of the time."

And on that I concur, as this is an indicator we have tracked very closely for years.

Here's our chart (orange line = 2yr yield, white line = fed funds rate)... Note how the current setup -- historically-speaking -- virtually assures a coming fed hike:

Some Caution on the Favorable Inflation Prints, Why We Like the Yen (again), And a Few Other Things

Lots to consider this week (underneath the headlines) in terms of data, the Fed, geopolitics, yada yada.

Thus, this weekend's macro analysis will be robust.

In the meantime, the following note will bring you up to speed.

Must-Read Macro Note

Our intro to this week's macro roundup consists simply of a handful of key/telling market highlights from my commentary over the past couple of weeks.

If you’d truly like to glimpse the forest through the trees, the macro note itself -- in terms of what’s happening below the surface and how we’re positioned for it -- is a must-read!  

This Fed is Different, AI's Inflation Impact, Gold Setup, etc (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Divergence

Now, make no mistake, I'm not complaining! I can't not like the results so far this week... That said, the under-the-surface dynamics are not remotely confirming what the headlines portend.

For example: The top panel is the S&P 500... The upward trend line captures the past 4 trading days, including today... The second panel measures the number of advancing stocks in the index vs the decliners through yesterday:

That's what's called a negative or "bearish" divergence.

As for today, so far, breadth isn't terrible, with roughly 65%/35% up vs down stocks, but still not all boats rising with the tide.

As for the sectors, once again, under the headline surface there are losses being taken in 5 of the 11 major sectors as I type:

Nothing to get too excited about, just what I view as a late-cycle dynamic to respect.

Crosscurrents!

This week's note offers important insight into what's developing at and below the surface... I.e., while our PWA Index shows real, and legitimate, signs of life, there remain underlying crosscurrents that to some extent muddy the overall go-forward macro setup.

As for the equity market, as I emphasized herein during the week, on the surface (the S&P 500) stocks ended up churning out a nice showing:

While, below the surface, not so much!

6 of the 11 sectors are finishing (as I type, 40 minutes before the close on Friday) in the red:

I.e., thanks to Amazon, and Alphabet -- moving the consumer discretionary and communication sectors up a ton -- the headline tape essentially misrepresents the overall message of the market for the week.

Said message being, the late-cycle is a period of heightened uncertainty and speculation, often characterized by aggressive rotations... This particular instance being exacerbated by a seriously-stressed geopolitical backdrop.

Here's this week's PWA Index scoring summary, followed by our latest important macro deep dive (clients, this is a must-read):