Friday I sold the remainder of my Small and Mid Cap Indexes. Markets have done extremely well over the past month, as investor sentiment is rising on hopes the Fed will pivot on raising interest rates and that China will ease its Zero Covid policy.
Euphoric investors believe that the declining economic data will cause the Fed to ease. I believe the declining economic data is…evidence of a declining economy. That’s the Fed’s explicit intent. I was optimistic that the Fed could engineer a “soft landing” as long as their terminal interest rate was below 4%. But that’s no longer the case. Their words and actions are now supportive of an extremely restrictive rate in excess of 5%. So until the unemployment rate gets high enough to squelch wage inflation, I think the Fed will likely remain obstructive. (Side note- the UK is officially in a recession, yet monetary & fiscal policy is TIGHTENING not easing.)
As to the relaxing of Zero Covid policies and a reopening of the Chinese economy, much of that hope is based on a smiling and maskless President Xi at the recent G20 meeting. And yet, while Chinese stocks are rebounding, I can’t help but wonder why Oil is dropping if the world’s second largest economy is on the brink of an expansive reopening.
As the attached chart indicates, the magnitude of Market volatility isn’t rising (suggesting investors haven’t yet capitulated during selloffs) but the lower threshold of volatility is increasing. All the while, during this run up, the S&P 500 still managed to fail this week at its 200 day moving average. That’s the third 200dma failure this year, the others were in August and April. Each of those failures precipitated a 17%+ selloff that resulted in a lower low.
In April and August I was confident that a sustained rebound could occur because the economy was strong and the Fed’s terminal rates were projected at 3.25% and 3.75%, respectively. Today the outlook is much less bright, economic conditions are deteriorating and the terminal rate is escalating to 5.25%.
So is an economic collapse imminent? NO! The Establishment casino dealers are simply reshuffling the economic deck of cards and a new hand will soon be dealt. Opportunities abound. [ Yes the casino reference is a subliminal message…where will you be on April Fool’s Day 2023? ]
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