The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Reversal
Almost all markets reversed their moves from yesterday. Equity futures began rallying in the early evening yesterday and continued overnight. Treasury yields dropped, as did crude. The Dollar weakened. About the only thing that extended yesterday’s post-FOMC move was inflation swaps. Inflation expectations are still dropping. Capital flow was light again today, 88%. Market participants are just not that active lately, which continues to be odd.
The markets are presenting us with puzzling behavior. Yesterday’s moves suggested a market reacting to the start of a rate-hiking cycle. Today’s moves suggest that the hiking cycle will not affect markets in the usual way. Which market reaction are we to trust? What is the market telling us?
The answer is that we don’t know. Both market moves can be explained with reasonable arguments. Who’s to say, in this moment, which case is stronger and which case will play out over time.
Perhaps the back-and-forth itself tells us that the markets *also* don’t know what to expect. If there were consensus as to how the new hiking cycle would affect stocks, bonds, and other asset classes, we’d already be trending. But we’re second-guessing. So what could *that* mean?
The market doesn’t agree that this hiking cycle will be a usual hiking cycle. The market is anticipating that the Fed can hike a few times, reduce inflation, and *not* damage growth and *not* push yields higher.
It’s certainly possible. I don’t think it’s highly probable. I could be wrong. Of course, the market could be wrong too. The point is that the market is keeping open the possibility that this hiking cycle accomplishes all the intended positives without significant negatives.
This means we’re going to be watching and waiting for economic consequences. If growth begins to suffer, prepare for material market impact. The opposite is also true. Ditto for inflation data.
It looks to me, like the market isn’t speculating that the hiking cycle will result in one directional outcome or the other. It looks like it will judge the evidence.
If this is true, what’s good for Main Street will also be good for Wall Street for a while.
The usual rubric will be flipped.
See you tomorrow.
-Mike
Visdom Market Commentary
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