ACTV - Time For Markets To Break Free?
2023-12-04 10:25:00 ET
Summary
- The S&P 500 has gone nowhere for two solid years. Is it finally time to break free from this persistent range?
- Our macro view is that inflation is not yet defeated, and that process may take the better part of a decade.
- In that time, we could see lower returns on assets and should be more tactical in our approach.
S&P 500 close on 11/30/21 : 4,567
S&P 500 close on 11/30/23 : 4,567
We let you know two years ago that we expected to see the market stuck in a trading range for the next 18 months. The numbers above show that the S&P 500 has gone nowhere for two solid years. The question now arises: is it finally time to break free from this persistent range?
We could be getting close, but we have some concerns. Our macro view is that inflation is not yet defeated, and that process may take the better part of a decade. In that time, we could see lower returns on assets and should be more tactical in our approach. Evidence that we may not be breaking out is that some of the biggest losers in 2023, including meme stocks and heavily shorted stocks, emerged as this week’s big winners. Investors seem to be chasing higher-risk assets or "beta" right now. That is more evidence of a bear market rally or performance chasing at the end of the year.
There does, however, appear to be a reversal of sorts or an unwinding of legacy positions. Winners of late include real estate stocks and small caps, while big-cap tech did not lead the market last week. Are things changing? For the longer term? The market seems to be coming to the idea of a tighter Fed being removed from the equation. (March rate cut odds hitting a lifetime high of 80%.)
It’s worth noting that not all market moves are entirely logical. Given recent economic data and posturing by the Fed, bonds have a real reason to rally. Stocks, on the other hand, need to reconcile with the concept that there is mounting evidence that the economy is slowing down. The Atlanta GDPNOW tracker recently slipped from 1.8% to 1.2%. While this could fuel further speculation about rate cuts, the market will ultimately need to come to terms with the impact of weakening economic data on corporate profits. The weeks preceding the first Fed rate cuts will bring anxiety for stocks as their prices are reconciled with a faltering economy.
We are happy with our significant gold positions and our recent bond adds. We need to stay patient with equities. The market can continue to move higher, as conditions are not in place for a significant selloff. Systematic strategies have been unwinding their previous short positioning, particularly in bonds. Currently, equity strategies are only modestly long. The more investors chase this market, the more likely the conditions are created where the market is primed for a selloff, but those conditions don’t exist for now. The options expiration on December 15th is the next big data point on the calendar.
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Time For Markets To Break Free?