I am very bullish on bonds. I expect Treasuries, in particular, to do well in the coming weeks.
In fact, bonds of all types should do well, because even if we get slight spread widening the overall performance should be good. I really liked that municipal bonds (iShares National Muni Bond ETF (MUB) ) went up every day last week even as Treasuries had good and bad days. The closed-end municipal bond funds did well too, which is also good.
So, how did I get so bullish on bonds?
Inflation
I've been arguing that inflation is coming down and the risk is that too many people who missed transitory a year ago, are going to miss it again this time around.
Oil had a bad week last week (which is good for the inflation story -- for now). I saw reports from the Kansas City Fed that their survey of supply chain delays dropped to an almost record low.
Finally, the NAHB, The National Association of Home Builders, which I view as a biased and generally optimistic group, hit levels not seen persistently since the end of the housing boom in the early/mid 2000s! Housing is an important industry and has great wealth effect implications, so this is all pulling inflation down.
The Fed
The Fed is going to sound hawkish but the data are likely to betray them and they are starting to sound like "Chicken Little," meaning markets can ignore them.
Jobs
The jobs picture is still strong, but I'm looking for cracks in the foundation to appear. Because of all the difficulty companies had hiring people, they are more reluctant to let them go (they will cut services first). Also, I'm hearing a lot of conversation that this time the size of the job cuts won't be the biggest issue. It will be the average wage of people being let go, which will be much higher, making a bigger dent in the economy for every layoff.
Russia and Ukraine
It seems that we are at a potential inflection point. I'm leaning towards the possibility that we get some "relief" coming into the winter as Ukraine will struggle with the attacks and infrastructure damage being done -- and I think the sanctions that are due to be added to energy will hurt us as much. It is more of a hope than a base case, but is possible. This would put pressure on energy stocks.
China and Covid
Are we just getting "false positive" and hearing what we want to hear, or is there more to the story? I still don't think China is investible.
A Couple of Points Much More Stock Related Than Bond Related
1. Crypto and Disruption. This continues to be a story and the wealth destruction continues. We think it remains an important issue, not just for those directly involved in the asset, but because of the drag on the economy. What happens with the Grayscale Trusts ( (GBTC) and (ETHE) ) could provide another leg down for crypto.
2. Fear and Greed. The CNN sentiment index has switched to "Greed." The AAII survey has the highest number of bulls they've had the entire year. Everyone is chattering about seasonality. We live in a world where we flip flop from overbought to oversold very quickly and this level of bullishness makes me a bit uncomfortable.
My, Admittedly, Complex View on Stocks
"Income" Stocks versus Commodity Stocks. I don't like the commodity sector here, but think dividend and "safe" stocks should do well.
Very near term -- mildly bearish. The problems in crypto and the overall bullish sentiment and price action late last week makes me a touch conservative.
Thanksgiving is critical. If we see some strength into Thanksgiving and the weekend, then I can get on board with a holiday rally. The seasonality can kick into high gear and lower yields can add fuel to the equity fire. If we don't get a rally around Thanksgiving, I'd get more bearish. I'm looking for a rally, but first another small pullback and need confirmation in and around Thanksgiving to fully endorse this switch (will send a comment if and when it occurs).
Then, finally, a bigger risk-off trade. If I'm right on how rapid the economy is deteriorating and services joins the problems in the new year, we could see a risk-off trade, where yields drop (I like bonds) but stocks drop, potentially testing the lows of this year.
My apologies for a "complex" outlook on stocks, but it's what my work is telling me, but at least I think take in some bonds!
