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So Much For The Selloff (Adaptation)
How worried should equity bulls be about the dramatic 2024 re-pricing across the US rates complex?
I've variously suggested, including this week, that the answer's "more." Stock bulls should be more worried than they were, say, a month ago.
After all, the situation's no longer amenable to the benign spin that helped justify nearly two-dozen new records on the S&P in 2024 despite the increasingly onerous (i.e., hawkish) rates outlook.
Up until a few weeks ago, stock bulls could argue that
Likely by the time they cut it will be too late, that’s what being data dependent means. But who knows when that is? I say within a year or much less. I have very little confidence in that guess. What I am confident about is when the economy turns it will be really fast and isn’t going to be pretty.
A bull case seems constructible from these things:
– Financial conditions are accomodative on some measures, even with short rates at 5%
– Markets are no longer pricing in short rates going down much if at all this year
– Short rates are probably not going up this year, or at least the bar for hikes is substantially high
– For long rates, see Yellen Put
– Economic growth in the US is decent, even the softness in 1Q advance GDP is largely from govt spending and net imports
– Economic conditions in the US are good, maybe not for CRE investors or low-income families, but how much representation do those have in the S&P 500 or 400 or 600?
– If economic growth or conditions weaken, see Powell Put
– Valuations are, um, well they don’t look too bad for RSP, S&P 400, S&P 600 and let’s talk about something else
– 1Q earnings, guides, reactions are coming in “okay”
Is it a raging bull case, or a long term bull case, no. Is it a case to significantly overweight equities when cash pays a not-trashy >5%, maybe no. But is it a short term bull case, maybe.
The market has had a lot thrown at it over the past month, and not a lot has stuck.
Gosh, I need to beat myself with my copy of Graham and Dodd.
What we have discovered is surprise, most of inflation would have taken care of itself and the rest will be sticky for a while. We spent too much money trying to save ourselves from COVID, probably at least twice as much as needed and mostly healed ourselves. I like the higher rates and if I could, would vote to keep them.
Consistent with my long term belief- the problem is not spending in excess of collected tax revenues- the problem is WHAT the money gets spent on.
Well if the American consumer is tapped, there’s Joe and Janet left to fill that spending void.