Investors seem to love acronyms. “FOMO” for “fear of missing out.”
“TINA” for “there is no alternative” to stocks. These acronyms seem to crop up during market bubbles when speculators are playing musical chairs and trying to think of justifications for buying stocks while the CAPE is higher than the 1929 peak.
Finally, the Federal Reserve has brought some sanity into the market by raising the fed funds rate to combat high inflation.
By Akane Otani, The Wall Street Journal, March 5, 2023
For the first time in years, things outside of the stock market — including emerging market assets, Treasurys and cash — are looking attractive.
Fund managers’ allocation to stocks is sitting at about 2.2 standard deviations below its long-term average…
Goldman Sachs Group Inc. has dubbed the shift “TARA,” short for “there are reasonable alternatives,” while Deutsche Bank AG has endorsed “TAPAS,” meaning “there are plenty of alternatives,” and Insight Investment has come up with “TIARA,” or “there is a realistic alternative” to stocks…
Analysts are also expecting S&P 500 earnings to decline in the first and second quarters of 2023. U.S. stocks still don’t look cheap, though…[end quote]
SPX is far from cheap. The entire stock market is still in a bubble even with its relatively small retreat from nosebleed highs. The Control Panel shows that the stock market is still far from capitulation.
The Fear & Greed Index is neutral. The trade is turning more toward risk-on as SPX and junk bonds are rising relative to the 10 year Treasury. USD, oil and copper have stabilized. Natgas is rising – it may have set a low or this may be noise.
After rising for the past couple of weeks, the Treasury yield curve may have stabilized for the time being. But the higher-than-expected inflation reported recently means that the Federal Reserve will surely continue raising the fed funds rate. Despite the inverted yield curve that may pressure higher yields in longer-term bonds. The Fed’s gradual roll-off of its longer-term assets is too small to impact the market. 10YT and 10Y TIPS yields are close to recent highs, presenting a buying opportunity for those who believe that inflation will moderate. Bond values usually rise during recessions.
The 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity has set a record low, again signaling a recession within the next few months. But this has been going on for several months and the anticipated recession hasn’t arrived yet.
Economic activity in the services sector expanded in February for the second consecutive month as the Services PMI® registered 55.1 percent, say the nation’s purchasing and supply executives in the latest Services ISM® Report On Business ®. The sector has grown in 32 of the last 33 months, with the lone contraction in December. Economic activity in the manufacturing sector contracted in February for the fourth consecutive month following a 28-month period of growth, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.
The Fed is quite concerned about the strength in the services sector since inflation is being driven by low unemployment which is driving wages. The prime age (25-54) labor force participation rate has recovered to its pre-pandemic level. The overall labor force participation rate is much lower. Many workers who left the work force (stopped seeking employment) during the pandemic have not returned.
With spring coming, the most active home-buying season has arrived. The 30 year mortgage is 6.65%, a 20 year high. The S&P/Case-Shiller U.S. National Home Price Index has dropped slightly but is still far above the 2008 bubble level. Existing home sales (units) are far below a year ago.
The Atlanta Fed GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2023 is 2.3 percent on March 1. That’s a lot better than a recession. The Fed will have no reason to back off raising the fed funds rate.
China unveiled its lowest GDP growth target, 5%, in more than a quarter-century as Beijing faces challenges in the domestic and global economy following its emergence from three years of strict Covid-19 measures. China’s economy has rebounded strongly since the “zero Covid” policy was rescinded but the government wants to focus on stability. Export growth began to slow in year-on-year terms, and then to reverse course in October, after consumers and businesses in the West cut back on spending amid central banks’ aggressive moves to tame inflation.
The METAR for next week is partly sunny. There’s no negative news impacting the stock market and the internals for the past week are positive. It’s far too soon to say that the recent positive trend is stable considering the Fed’s policy but for the short term it’s stable.