I start this week where I started last week.
I remain, on a scale of -10 to +10 on equities at about -4. Low to medium bearish.
Within equities, I'm more like a -6 or -7 on big tech, -1 on banks and commodities, +2 on the Russell 2000.
I'm bearish on rates and expect more inversion as the Fed sticks to their guns on no cuts, despite last week's relatively tame inflation data, though I am drifting towards neutral on rates as we had a nice selloff as the 10-Year yield, at 3.55%, is 25 basis points above where it was on April 6.
If I have two issues with the lower-than-expected inflation data it is these two:
1. It is occurring for "the wrong reasons"
We aren't getting improvements in inflation due to better production, bumper crops or greater supply. We are getting it because there are signs across the board that the economy has resumed the weakening trend that was in place last fall. There are even signs that the job market is less robust than it was (though still good).
Is the consumer slowing again? The resiliency of the "legendary" American consumer may be getting tested again as spending declined and debt is mounting, along with delinquencies.
2. The belief that lower inflation will mean the end of hikes is correct. But will it mean we get cuts later this year?
Only if the economy is a mess, which isn't good for stocks.
But, my bigger gripe is that an end of hikes doesn't mean "long duration assets" (like growth stocks) need to perform well. The age of "ZIRP" or TINA or FOMO was very different:
-- Rates were well below 1% for most of the yield curve, versus 3.5% or higher now. That is a meaningful difference that makes yields more attractive in comparison to the height of "stocks as long duration assets" and will impose a significant cost to companies that borrow, over time. Many did a great job of locking in low interest rates for a long time, but that benefit erodes over time as debt matures and new debt is issued at current yields.
-- We had QE not QT. QE forces investors to move out the risk spectrum as potential investment options are removed from the public sphere. The reverse happens with QT (though it isn't magnified as much since the Fed bought longer-dated bonds and is only allowing their balance sheet to reduce via maturities). The recent "post bank crisis" rally occurred as the Fed's balance sheet "temporarily" spiked as banks went to the discount window.
-- The Fed "Put" was alive and well. We had a Fed that wanted growth and asset price appreciation at almost any cost. Any downward move in stocks created dovish talk. That just isn't the case at the moment. It may become the "norm" again in the future, but the fact that they missed inflation and were dismissive in their "transitory" talk is too fresh in their minds, so we have a different mindset that isn't supportive for stocks.
-- Access to credit, in its entirety, was easy -- now, not so much. Whatever is occurring on the bank deposit front is likely to reduce access to credit, which is another change.
Conditions are not ripe for a stock rally based on the Fed being done with hikes.
If, and this is a big if, we see companies produce "okay" earnings and rally strongly on the back of that (and hold those gains), I could change my tune as it would indicate the market is too pessimistic.