As usual, some sort of crisis happens anytime I'm on holiday in March which prevents me from truly relaxing. I mentioned in early January that expectations this year were very low which had bullish implications for 2023. I also mentioned this:
Coming into the year, the following was the consensus thinking.
- Bad first half, good second half with lower low in market
- value over growth
- underweight tech
- higher for longer
- recession evident before end of year
- flat to modest gain in the market
As per usual, the market has foiled the consensus so far. What's the motto of this blog again? The growth over value trade may be overheating now in the ST but there's still plenty of doubters out there. The acute underweight of tech stocks I had mentioned in early January is probably not as acute but we're far from the "pros"" being overweight tech from what I can gather. It will be interesting to see the latest positioning stats of money managers.
The banking crisis in March was quite short lived as the Fed heads in the US and Europe stepped in aggressively. This is what the Feds are best at - providing emergency liquidity to prevent a contagion.
What the Feds are not good at is managing or forecasting the economy as it pertains to monetary policy. Credit spreads barely budged during the banking crisis and the equity markets recovered all the losses and then some. That should be making bears shit their pants, but rather what I see from them is more hand wringing and snark. Instead of capitulation, they are digging in their heels. Comments I hear from them are "This is just the beginning of an even bigger banking crisis down the road". There's been no recession in Q1 as many were expecting but again, instead of capitulation and admission of being wrong, economists and bears are digging in their heels by simply moving their recession calls to June. With this banking crisis, we are surely to get a recession now they claim, because banks will be more focused on shoring up their balances sheets rather than lending. Maybe, We'll just have to see about that. All I can say is that this banking crisis just serves to lower already low expectations even lower.
I try my best to be a pragmatist. I adhere to the motto of this blog because it works, it's a money maker. One of my favorite things to do is to figure out what the average person's view of the market is going forward and then fading that view if it's showing an extreme and especially when it's contrary to what market action has been. Why is it that the motto of this blog works so well? It's because the market is a reflection of everyone's expectations and so chances are if there's a widely held concern or belief about something it's already being reflected in prices. There's a bit of an art to this because sometimes it takes a while for the herd to fully express such views as they may have been anchored to an opposing one for such a long time. The higher for longer narrative is a good example of something that probably took several months for the majority to embrace. In the first few months of 2022 a lot of people were shell- shocked by the abrupt change in the interest rate environment as we were in an ultra low rate environment for several years, but by the fall pretty much everyone had adjusted their view and accepted the notion that high interest rates are hear to stay which is why hawkish Fed comments have been losing their bite in recent months. Sure, you still get knee-jerk reactions but Fed hawkishness is like beating a dead horse - it's old news unless the Fed funds rate would be poised to go to 7%.. What moves the needle in financial markets are surprises. What would be the biggest surprise this year? Cleary it would be if we don't get a recession or even if we do, a mild one would still be considered a surprise. To move the needle on the downside I suspect we would need to get a severe recession.
I mentioned in January there were very low expectations coming into 2023. With the market up a solid 8% at end of Q1 has this view changed? It doesn't appear so according to This recent CNBC poll which took forecasts from over 400 so called "pros". Only 16% believe we are beginning to rally, 16% believe we are close to a bottom and 68% expect more room to fall (in other words expect new lows). So, despite the market being up notably for the past 3, 6 and 9 months there's very few believers of this market. It's still a bear market according to most. Probably the number one thing that is keeping people bearish is the inverted yield curve which has everyone bracing for a recession. "The Fed will raise rates until something brakes" is a common bear mantra. In 2008 the mortgage market broke in the US because there was a lot of bad lending and significant ARMS exposure. Less likely to happen this time around given that 99% of US mortgage borrowers have locked in rates at much lower levels and have 15-30 year terms. Corporations have also locked in low rates as well. You can argue that the small banks "broke" with the recent crisis but the Feds fixed this instantly by allowing banks to effectively cash in their underwater bonds at book value. But there will be other shoes to drop as a result of this the bears say. Lending will surely contract. Maybe, we'll see. But what if inflation pressures continue to fall and the economy slows down but doesn't crash which then gives the Fed cover to adjust rates lower? People seem to believe that the only way inflation pressures are going to drop significantly is if we get a recession. What if that's simply not true? 5 year break even inflation rates have been averaging about 2.5% since July and have been gradually on the decline for 1 year as inflation pressures have been NATURALY abating despite the fact that consumer spending has not let up at all since then.
We've been in a rather choppy market for the past 9 months which to me looks like a base. Bears of course are going to say it looks like a bear flag, but I will say this. If I woke up from a 5 year coma and the first thing I did was look at 5 year chart of the market, I'm pretty sure I would say that it looks like the market is consolidating gains from recent years and is forming a base which will lead to an upside breakout at some point. That would be an objective viewpoint based solely on market action without any biases or influences from news flow, economists, pundits and what have you.
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