The Trend Remains Up.
Macro risks only matter when markets decide to price it in.
Equity Market Trend
The trend remains higher. Until the uptrend breaks, there is no technical reason to be overly bearish on risk assets.
There are macro and fundamental / valuation reasons to be cautious — outlined here:
However, the music is still playing and the market is still dancing.
For now, the trend remains clear.
There are intermarket trends between sectors that typically provide a warning before major market tops. These continue to support the uptrend in equity indices shown above.
The fixed income market is also suggesting a major change in trend is not imminent. Junk bonds continue to outperform US government bonds. In other words, fixed income investors are currently willing to accept a high degree of credit risk at increasingly low spreads above safe and liquid t-bonds. This is a typical sign of bullish market conditions.
This sentiment also carries over into the relationship between Emerging Markets Bonds vs US Government Bonds. Again, another indication of risk appetite.
Trend In Danger?
All of this said, there are some shifts occurring under the surface of the market that may endanger the bullish sentiment. Commodities have now clearly resumed their uptrend vs bonds. This is indicative of a resurgence of inflationary pressures. CPI missed yesterday (3.7 vs 3.6 expected) and if this trend continues that upward pressure on prices is likely to worsen.
Here is another chart showing inflationary pressures resuming. Inflation Expectations (RINF) is now at YTD highs and moving higher.
One more — 🛢️oil prices have broken their post-Ukraine Invasion downtrend and are now making higher highs and higher lows. This is the definition of a uptrend. The #1 influence on consumer inflation expectations is the price they pay at the pump. ⛽️
A widespread realization that inflation is not yet dead will likely lead to a re-pricing of future Fed Funds rate hike probabilities. I recently discussed the likelihood of the economy remaining in the “Stagflation” phase of the business cycle here:
Conclusion
For the moment, the trend in equities markets remains up. As such, my personal portfolios are between 75%-80% invested in risk assets (which I will be sharing soon as a regular part of this newsletter). However, as described above, it is important to be aware of the mounting risk that could imperil the uptrend and possibly lead to lower risk asset values.
— Brant
Disclaimer: The content provided on the Capital Notes newsletter is for general information purposes only. No information, materials, services, and other content provided in this post constitute solicitation, recommendation, endorsement or any financial, investment, or other advice. Seek independent professional consultation in the form of legal, financial, and fiscal advice before making any investment decision. Always perform your own due diligence.