April 19, 2024


At times the equity market seems like a coin toss, but right now, it is a ‘heads-I-win, tails-you-lose’ game.

The thing is, I agree with this because these are the two most likely paths from here:

1) Growth is surprisingly upward

At the end of the day, development is good. Consumer spending is by far the driving force of the US economy and most US homeowners still have money from fixed 30-year mortgages and secure jobs that are paying better than ever. Companies remain cautious in 2023 due to recession fears, but they may start investing again as AI continues to improve productivity.

2) development falters

Interest rates are undefeated as a drag on economic growth. It’s not a good time to borrow money and banks are struggling under the burden of the depressed office and commercial real estate markets. Car sales have slowed and should remain soft due to high financing rates. Global demand is also decreasing, which is affecting US exports. There is a cure for all this, however: If growth disappoints, the Fed could cut rates.

This is a classic case of the fed put.

The only scenario where this really goes wrong is if inflation rises again as growth slows. This is certainly a tail risk, but its maximum probability is 5%, especially with the possibility of the US importing deflation from abroad.

A higher possibility – I believe – is that growth surprises on the upside but inflation also surprises on the downside. This would be a perfect Goldilocks scenario and you could see oil drop below $1.30 today (and $7 since last Friday).

Looking at the equity picture, it looks like tech could go super-nova. Fund managers and individuals are clearly chasing mega-cap techniques here because… what other business is there? If you don’t have one of the mag 7 (6?) you have very little chance of matching the index. It is difficult to justify some of the valuations, but when has that stopped the equity market bullishness?

I’m obviously not breaking any ground here as the market (and me) figured this out some time ago, but it’s such a compelling backdrop that it’s the kind of thing that could lead to massive overshoot.

Source: www.forexlive.com

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