There was a lot of chatter after stocks rebounded late in the week and are up nicely on the year (3.5% for the S&P 500 and 6.5% for the Nasdaq) about whether we have entered a new bull market.
The view seems to hinge on the following:
Inflation has come down and data, especially jobs, is OK.
I think that view is too simplistic as much of the data is weak and there is little reason to think the data will stop here rather than continue to weaken (deflation is generally not good, and I'm convinced that is the direction inflation data is headed).
The Fed is nearly done hiking.
I agree with this and I like that Fed Vice Chair Lael Brainard noted that we are not in a wage/price spiral because I've been arguing against that for months! What I think people miss here is that the Fed will remain skewed to hawkish comments and will be extremely reluctant to cut, largely because the current group missed inflation and will err on the side of caution not to repeat its mistake.
The lag effect is priced in.
Yes, the actions of the Fed take time to work their way into the system, but the market is a forward-looking mechanism so has already priced that in. This is the same market that took the ARK Innovation ETF (ARKK) to $156.58 then back to $29.64 in less than two years (I was trading this ETF from long side to start the year, but I'm back to the short side here). Sorry, if I discount the "discounting mechanism" theory. I don't think the lag effect is priced in.
That said, I need to respect the potential for this "new bull" narrative to get traction and be amplified by the abundance of extremely short-dated option trading.
Ignoring quantitative tightening.
Fed Governor Christopher Waller on Friday said there was no problem doing QT and even cutting rates. I think QT acts as a more direct weight on asset prices than rates. Think of salt and pepper -- both make food taste better, but they are not remotely the same thing (also, I've never had a doctor tell me to reduce my pepper intake). If QT is here to stay -- and I believe it is -- it will be more difficult for risk assets to break out.
I rode the risk asset rally into the second week of the year but cannot be bullish here. I'm not pound-the-table bearish -- there is too much going on for that -- but my portfolio is heavily skewed to cash and some opportunistic trading, with a bias to sell rips and cover than to buy dips.
On credit side, I'm slightly biased to be short intermediate to longer-dated investment grade credit. I don't like the risk/reward of products such as Vanguard Long-Term Corporate Bond Index Fund ETF Shares (VCLT) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) (long-dated IG bond ETFs) because the spread risk in a downturn is high relative to the Treasury risk benefit, and vice versa if we really are in an all-clear environment.
