by bitkogan
Hey there, friends!
A few commentators on my posts have reacted with skepticism, even mirth, towards my somewhat cautious stance on today’s market. Sure, the market has rallied impressively since last October – the S&P500 has risen over 22% from its lows, and, since the start of this year, the index has surged almost 14%, outperforming global indices, including the MSCI All Country World and the Stoxx Europe 600.
Some have even argued that the US economy has never been in better shape. The labor market is robust, unemployment is at a record low, and Americans seem to have enough disposable income to invest in the stock market.
It’s quite the rosy picture, right?
Well…let’s step back and view the broader picture. For two consecutive days, the Fed’s Chair, Powell, has maintained that we need two more rate hikes this year. This sentiment is shared by the majority of FOMC members – this despite the current key rate sitting at a substantial 5-5.25% p.a.
Last week, the Fed took a breather on rate increases, citing the need to scrutinize incoming data. But Powell essentially admitted that he’s somewhat in the dark about the current state of affairs and how to handle it. Yes, inflation has decelerated, but the Core PCE remains above 5%.
So, the Fed is seemingly prepared to continue battling for a slowdown in economic activity and a loosening of labor market conditions. While US GDP growth faltered in Q1, the trade deficit ballooned during the same period. Jobless claims have risen too. But most notably, the UST yield curve remains inverted, and the yield difference in its most sensitive section is nearing 1 percentage point. The party is still on, but the scent of recession lingers in the air.
What’s happening with other central banks? The Bank of England upped its rates by 50bp today. The ECB tightened its policy last week and has plans to continue doing so. The same goes for central banks in Norway and Switzerland.
And let’s not forget the volatility in the energy market. The price of oil is seeing quite the fluctuations!
Despite it all, I won’t deny that the market may still have some upward momentum. The S&P 500 corrected this week following the sell-off in tech stocks – a logical development. After the rally in AI-linked stocks, it would be foolhardy not to lock in some profits.
But what will the next bull market look like? On a global scale, indices do look promising, especially if we consider levels from 2010 onwards. In my view, it’s not a far-fetched idea that the S&P 500 breaks 4500 points, maybe even 4750. If shorts start covering at proximate levels, we might well witness a local rally. But a double top followed by a trend reversal could also be in the cards, especially if the Fed’s measures begin to yield results.
For the market to continue its upward trajectory, we’ll need a potent driver. The technology sector, led by AI companies, is a possible contender, but it represents just a slice of the entire economy. And considering the “interesting” dynamics with China, we’re in for some heavy lifting.
Regardless, I’m keeping my short positions. They represent a minor share of my portfolio, so even if the market soars further, it won’t affect me significantly.