The market was essentially flat to barely up for the week. This suggests a stalemate now between those who believe in a “soft landing” in which higher interest rates slowly tamp down inflation and growth until we hit some steady state without recession and those (an increasingly fewer number) who see inflation as more stubborn and a recession as far more likely.
The soft landing crowd has powered the recent rise in the S&P 500 over the last month, with the S&P bouncing off an October 27 low of 4,117 to around 4,600 today. Falling inflationary expectations have likewise sparked a robust bond market rally, with bond prices rising as inflation falls and yields dropping from around 5% to around 4.25% since October.
The stagflation crowd has, for now, closed its shorts and waits on the sidelines in what many in this crowd believe is 50-50 gamble up or down rather than an intelligent speculation on a bear market.
Teaching point: In stock market investing, you always want to intelligently speculate just like a good poker player playing the odds. What you don’t want to do is gamble as in roulette where you have a 50-50 chance of winning on black or green (minus a small edge with the green to the casino).
I continue to believe cash parked in short term instruments yielding 4-5% is the prudent course. There are just too many headwinds facing our economy – most driven by Bidenomics.
The bigger picture reveals more of a trading range market than any Biden bull. Remember here that the Biden bull peaked at 4766 on the S&P 500 on December 27, 2021, and remains well short of that level through its range-bound meanderings.
As for the data this week, notable was the blowout revision to third quarter GDP, up 5.2% from 4.9%. This is wildly unsustainable as steady state growth is anywhere from one to two percent in a Bidenomics world to two to three percent in a Trump world.
This blowout number certainly caught the attention of Fed Chair Jerome Powell who, in a Friday speech, as reported in the press “pushed back against Wall Street’s growing expectations of interest-rate cuts in the first half of 2024, saying the committee will move cautiously with borrowing costs at a 22-year high but retain the option to hike further.”
Most chilling for the markets was Powell’s admonition that: “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” that “we are prepared to tighten policy further if it becomes appropriate to do so,” and that “monetary policy is thought to affect economic conditions with a lag, and the full effects of our tightening have likely not yet been felt.”
Yet, market participants wound up not buying any of Powell’s pessimism. His warnings fell on deaf ears and both the stock and bond markets enjoyed a nice little post-Powell bump.
In other news, on Friday the ISM Manufacturing index was released – it’s one of my favorite indicators and a key canary in the coal mine of any investment-led recession (as opposed to a consumer-led recession). Anything under 50 on the 1-100 ISM diffusion index indicates a contracting manufacturing sector, and for the 13th straight month in Joe Biden’s economy, that index came in below 50, unchanged at 46.7. That’s unprecedented in the face of GDP growth numbers that are off the charts – something is clearly amiss.
Well, that’s it for now. Stay tuned for a blockbuster Substack column on Tony Fauci over the weekend.
The Soft-Landing Crowd Versus the Stagflation Crowd