I love this time of the year. I get this cozy, content feeling as flowers bloom and the weather warms up, knowing that a lot more good weather is still to come. Last week was my birthday. When you're very young you can't wait for your birthday to come but that changes when you get older. When I hit my mid 20s I started dreading my birthday, because it was a reminder that I had not had a successful life both from a personal and career standpoint. I was falling behind in life. I felt as if I was still at the starting line while friends and family were so far ahead of me. Every so often I would get an intense feeling of anxiety or sadness as I reflected upon my life thinking that I've failed to live up to my potential, but I wouldn't dwell on these negative emotions for long. I never fell into a depression or felt sorry for myself. I would always pick myself back up knowing deep down that I had what it took to be successful in all aspects of life and I still had time on my side to make things right. I knew that the correct approach to get to where I wanted to be was to stay positive and take action, doing things that are in my control which would increase my chances of success. I was able to get my life back on track through persistence, skill and a large heaping of luck. It wasn't a smooth path to recovery by any means. The last 2 major setbacks I had to endure was the Greenstar debacle in 2014 and me getting fired from a job in 2018 (which I saw coming and was a relief). Ironically, both of these setbacks were part of a chain of events which led to me where I am today. I ended up landing a great position working with a great team of people with an amazing pipeline of opportunities. I also recovered all my losses from Greenstar. I could not have asked for a better situation to be in. Prior to Greenstar I was managing my own money and that of a few personal friends/acquaintances via an informal, good faith arrangement.. Now, I have a "real job" as an advisor and only personally manage my own money. My advisory role allows me to earn a solid income relieving any pressure for me to have to perform with my personal money. I have a really good foundation in place to have a lot of financial success As I mentioned prior, a big part of being in the situation I am in right now was due to luck - perhaps it was the biggest factor, it definitely was not the smallest. If you look at successful people, luck is often a key contributor to their success. Yes, skill, working hard, and having a positive attitude are critical, but non-controlling factors such as your parents, being born at a particular point in time, growing up in a certain country, coming into contract with certain people by chance are things that you can't control yet they are often crucial in providing the opportunities for your skills, hard work and positive attitude to bear fruit. I for one will not be complacent about the situation I am in now. If anything, I get overly worried that something could derail me once again. Last year I had some sleepless nights because of the market even though I had properly positioned clients and myself.. I couldn't help but fear that my career and financial well being would take a major turn for the worse. I knew deep down it was an irrational fear but I couldn't help it. I've weathered the market storm quite well but by no means do I get an all clear feeling. I, like most people, am bracing for more upheaval and that's probably a good sign.
In my last post about a month ago I suggested ST caution. The market didn't really go anywhere afterwards until last week when it made a marginal breakout. Since my last post the Fed hiked by .25 and strongly suggested that future rate hikes are unlikely but that rate cuts are also unlikely .Markets meanwhile have been pricing in about a 1% rate cut by the end of the year and about another 1.5% cut by the end of 2024. When I see the market pricing in such a radical difference from the present like this, I pay special attention and I tend to believe what the market is signaling about the future because I have found that the market gets proven right. For instance, when oil was trading sub $30 in 2020, futures were in a steep contango, correctly forecasting that oil prices were poised to rise significantly in the months ahead. The opposite happened in the spring of 2022 when oil prices were north of $100. Futures were in deep backwardation signaling lower prices in the months ahead. I saw similar signaling behavior in the futures market for iron ore. So, if we are to believe that the futures market will be right about the Fed cutting rates it must mean that inflation is going to drop significantly from here. That can happen either in a bad way or a good way. The bad way is that we have a recession and/or financial crisis. In the good scenario, it will be the result of inflation subsiding back to 2-3% without a nasty downturn, (perhaps only a slowdown) as COVID induced inflation pressures are largely wrung out. The vast majority are clearly bracing for the former, not the latter, yet so far the evidence is suggesting the latter is playing out. Remember, at the end of Q1 when a recession didn't materialize, bears simply scoffed and moved their call to June. Well, June is just around the corner and still no signs of a recession, meanwhile the market is hanging tough, grudgingly at the high for the year., up about 10% YTD.
Over the past few weeks there has been 2 major concerns about the markets. One of them is the dreaded debt ceiling, the other is poor market breadth. All the talk and worry about the debt ceiling reminds me of Y2K fears people had about computers shutting down at the turn of the millennium. I see people pointing out how the market reacted badly in 2011 when there was a debt ceiling impasse which resulted in the credit downgrade of the US debt (which was so silly) which resulted in stock market turmoil - ironically US treasuries rallied HARD on this "downgrade". The big difference between then and now is that there's no surprise factor this time around. All of today's worries actually increase the chances of there not being another crisis this time ,because since authorities are so well aware of what can go wrong, they are motivated to do what's necessary to avert/solve/mitigate any crisis before it can happen. If someone tells you I'm going to punch you in face in 5 seconds, you would probably put your guard up or be ready to duck. Quite a difference compared to if someone cold cocks you. This analogy applies to the markets in general. Major moves in the market happen as a result of surprises - things that are not expected or priced in. Think about what expectations were coming into 2022. The consensus forecast by the "experts" was for rates to remain ultra low for the entire year with only modest hikes penciled in by the end of the year at most. The negative surprise of rapid rate hikes along with the Ukraine War resulted in a significant resetting of expectations lower hence lower stock and bond prices. Coming into 2022 I'm sure there were also plenty of folks thinking "With the Fed fund rates at 0%, I don't have to worry about a bear market on the horizon - that's never happened. I'll have time to get out once rates have risen significantly." The market obviously front ran the Fed in 2022 leaving people in disbelief and slow to react for the first 6 months of the year.
Now we have a situation that's the complete opposite in many ways.. Higher for longer has replaced lower for longer as the consensus view. "There's no way the market can be in bull mode with rates this high" is what a lot of people are thinking I'm sure. Yet, here we are with it been 7 months since the market has made its low, up about 20% since that point and now higher than it was 1 year ago. That's simply not how bear markets behave. Oh but it's only a handful of tech stocks driving the market. Yes, that's true. Since the banking crisis in March, the small cap stocks have not recovered all that much. But remember coming into this year, nobody wanted to touch tech stocks and nobody was pointing out (except for me and few others) that the average stock was performing well with several sub sectors looking much better than the overall SPX. Nope. Instead people were complaining and warning about lagging tech. Then things changed. Now, it's the opposite situation. People are complaining about how it's only tech holding up the market. It would not surprise me now if we see small cap start beating tech in the coming weeks just to stick to the herd once again which has been relentlessly bearish in general. The market doesn't make things so neat and obvious otherwise most people would correctly be buying at lows and selling at highs.
The bottom line is that despite the market's good performance YTD, market expectations in general are still quite low in my opinion, as there still a large cohort of investors/traders who remain defensively positioned and have been skeptical about the market for several months. I read from a bearishly inclined money manager how the average household is still holing a historically high equity allocation, yet they never mentioned once over the last several months how money managers and retail trader types have been very defensively positioned, overweight bonds and cash vs stocks which obviously has been the wrong posture. The ST is often tricky and right now at this point the indicators are a mixed bag. A bit of a shakeout would make the market more primed to make a sustainable breakout later in my opinion. What I'm more certain of is that there's a powder keg of buying power out there and as each week goes by where there's no dreaded recession or financial upheaval, the fuse keeps burning, getting closer to the point where this powder keg could explode.
