Based on some emails, some people are expressing frustration simply because the market and economy aren’t conforming to their expectations. That is not supposed to be funny. Indeed, markets often defy our expectations. The financial markets are influenced by a myriad of factors and these factors can interact in complex ways, leading to outcomes that may not align with what analysts or investors predict.
Looking elsewhere, there has been a significant shift in expectations regarding interest rate cuts on Wall Street. At the beginning of the year, there was widespread anticipation of 3 to 6 cuts in 2024 based on the Fed Fund Futures pricing. However, the sentiment now suggests a notable departure from this outlook, with many speculators now predicting no cuts at all for the remainder of 2024.
For whatever reason, risk assets were undeterred for now. What matters is that rates are going lower. How much lower, and how soon, is largely irrelevant for now, thus the great disconnect according to a partner based in the US. Well, I accept that.
Since the rest of the world always looks up to the US for policy direction, let us turn our focus on the powerful Jerome Powell who is backed by 785 economists working at the Fed. He repeated on Wednesday that he doesn’t expect “that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2%.”
Active managers had less than 25% exposure to equities in late October when the S&P 500 was at 4,100. Today, their equity exposure has jumped to 104% (leveraged long), with the S&P 500 above 5,100. This is their highest exposure since November 2021. According to Charlie Bilello of Creative Planning in a recent post. So things seem to be a little too hot at the moment.
Not too great but read on. Markets tend to overshoot to the upside as well as downside. I don’t really care if the Fed is making a big mistake or not in their work. It is reasonable to seek comfort in a brief break, especially in the middle of a bull run. Whether that is common sense or bullshit depends on who you ask.
Grab your popcorn for those who loaded too much into the momentum trades. As a watcher of global markets for many years, bear or difficult stock markets are easier to trade than bull markets for some of the alternative investment strategies in my portfolio. Further volatility down the road will benefit a number of global macro funds on our radar which are designed to profit regardless of the stock and bond market conditions.