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This is a market searching for “what’s next”

November 06, 2023

Stocks mounted a massive reversal last week, rallying off multi-month lows amid a collapse in Treasury yields as traders digested a less-hawkish-than-feared Fed, good earnings, and more evidence of easing inflation. The S&P 500 spiked 5.85% on the week.
Last week, investors were reminded forcefully that those Three Pillars are still in place. And due mostly to short-term oversold technical conditions and suddenly very negative investor sentiment, markets rallied hard with the S&P 500 producing its best week of the year so far. In doing so, the S&P 500 essentially started the week at the lower end of the recent trading range (sub-4,200) and ended it at the upper end of the recent trading range (around 4,350ish). Things weren’t that bad on Monday, but I don’t think they were that good on Friday.

The market rallied last week as the Fed signaled it’s likely (but not absolutely) done with rate hikes, the avalanche of Treasury sales will be slightly smaller than feared, and (this is new) the economic data is suddenly starting to show what has been the theme of the Q3 earnings season: The economy may not be as strong as the backward-looking data implies.

Now, I don’t have a crystal ball, and neither do you. But the point here is clear: If economic data is starting to roll over, then 1) Treasury yields will no longer be an influence on markets, 2) Economic data, not the Fed nor yields, will become the main driver (so you need someone watching the data, which we will) and 3) Despite the market’s euphoric reaction last week, the downside risks will grow but so will the upside potential.
Buying into this rally may, for some, seem foolish, but I see enough positives going forward that I want to be in when this market gets beyond interest rate worries and begins to look forward to the Fed decreasing interest rates sometime next year. You cannot time exactly when that will be, but you just must be in. The chart below demonstrates why it does not pay to be out. This 20-year time horizon is 5020 trading days and demonstrates, over the past twenty years, that missing the best ten days would reduce your return by almost half. This is a JP Morgan chart.

Bottom line, this is a market searching for “what’s next” and that could be either 1) A growth scare or 2) A resumption of the soft landing and disinflation narrative that push stocks higher this summer. We will all find out together via the data (which again, we’ll be watching). Given this is a market searching for “what’s next” and not riding a wave of sustainably new information (positive or negative) then that will keep me skeptical of either extreme in the current trading range, and that includes reminding you that fundamentals didn’t turn that bad two Friday’s ago (and as such the market reaction was extreme to the actual events) and that bad economic data (which we had last week) doesn't mean stocks should trade near the high end of the range, either.

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