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Recent economic data releases indicated a slight decrease in the speed of economic growth in the beginning of 2024 in some metrics and a still‐roaring economy in others. With that said, the Federal Reserve has maintained a relatively hawkish position, downplaying the need for rate cuts in the near future in its latest rate decision. This means that there is more uncertainty surrounding the economy than media is focused on or that the VIX volatility index is pricing in. This, in turn, indicates that market participants could be aggregately positioned for conditions that are not realistic and thus the equities market could be subject to another pullback. As we enter the spring, March is historically a time of elevated risk for markets and with the economy sending mixed signals, the market is vulnerable to either a too‐strong economy or one that is weakening. It is important to remember that media talk about how “this time the Fed is going to achieve a soft landing” is an indicator of recession on the horizon. The historical probability of that outcome is very low.
The S&P 500 is trading at all‐time highs, just below 5000. The index has been shrugging off all “bad” news and rising relentlessly since mid‐January, where a prior bullish move from the lows of October found an equilibrium range for a month between 4700 and 4800. This type of trading pattern, when combined with the behavior relative to news items, suggests that a bull market is underway. Even with the potential for danger coming from economic data, it is unwise to fight the market, and we expect the S&P to continue rising, even if the economy enters a recession. This is because inflation numbers suggest that corporate profit margins are increasing and that sales are remaining robust.
Interest rates have found a relatively stable range over the past month, and barring any significant news, or evidence of changes in economic conditions, are likely to remain stable. 10‐year A rated corporate paper is yielding close to 5%, which is beneficial for income investors and those using fixed income positions to hedge equity volatility risk in their portfolios. The 10‐year Treasury is yielding 4.1%, which suggests that informed expectations for inflation are around 3.5% to 4%, not the 2% the Fed says it is targeting in its commentary. While there is a saying “don’t fight the Fed,” we’d prefer to “not fight the bond market.” This is because the participants in Treasury markets represent some of the most informed and well‐capitalized in any market in the world. The Fed can influence rates somewhat, but the Treasury market is still ruled by supply and demand.
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