Making sense of markets
Our sense of day to day market movements.
The pattern seems reasonably clear. Here’s a long paragraph, but stick with it.
We go through little episodes of the market thinking that the Fed is thinking it will pause in its hawkish commentary with yields at approximately these levels, perhaps because of modestly weakening data (e.g. the new home sales, mortgage application data) as providing evidence of traction. Perhaps “it feels like enough” (yes, monetary policy is conducted as much by feel and interpretation of data as anything else) and thus we get the pattern we see in the “constellation of assets below”, which we describe in words below the graphic.
Yields fall, which means secular growth stocks do well, alongside risky assets that in general do well as those yields fall. (This also lends weight to the “it’s enough” idea because they wouldn’t necessarily rally if the cause of the yields was due to negative growth shocks. However we bold “necessarily”, because sometimes in the weird world of markets good news is bad news and vice versa.) That means financial conditions have eased.
The easing of those financial conditions is not what the Fed wants, indeed, they are only “on pause” if the conditions do in fact tighten, and hence they are back to making hawkish noises again. This was the nature of Governor Waller’s comments overnight, in which he reiterated the preference for multiple back to back 50 point hikes. This is showing up in higher yields today, weaker stocks today, and so on.
Commodities once again remain the general exception, given the UKR-RUS war.
But, the above is a good general guide to what’s happening in markets. How far you think they’ll go, and what their “pause points” or pain points are, determines your growth vs value and risk-on versus risk-off strategy tilts.
We continue to think the growth stocks will go lower, that value strategies will perform well, and that having positive rates beta in the portfolio is a sensible strategy. The time will come to rotate back, but, we think, that time is not today.
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