Fighting the Last War

People tend to extrapolate the stock market to the real economy. 

When the stock market is strong, the economy is considered strong.  When the stock market is weak, the economy is considered weak.  The stock market is strong.  The SPX is around all time highs.  So right now, the bias in the investment community is to be positive on the economy.  But its clear that the economy is slowing.  If the economy was so strong, why would unemployment rates go up in so many states?  Why isn't the Russell 2000 stronger than the SPX in an up market?  The Russell 2000 usually outperforms when the economy is strengthening.  

Russell 2000/SPX ratio

The signs are there that the economy is slowing.  But all I hear on CNBC is how the economy is strong enough that the Fed doesn't need to cut, that too many rate cuts are priced into STIRS.  But that's flawed logic.  The market rallied strongly in November and December because of increased rate cut expectations, not in spite of them.  If you take away those rate cuts priced into STIRs and the rest of the yield curve, then the stock market weakens, and financial conditions tighten.  

I rarely hear anyone say that the market pricing is about right, or that its not pricing in enough rate cuts because the economy will weaken in 2024.  People are fighting the last war, inflation.  There are more people worried about inflation re-igniting than about a hard landing.  I still hear talk about how Jerome Powell doesn't want to repeat the mistake of cutting early like Arthur Burns.  Are we still in 2022?  I thought we found out a while ago that Powell is no Volcker.  Disinflation is likely to continue.  There are so many biases built into the CPI and PCE that understate inflation that's its not easy to get high inflation numbers showing up in the government stats.  With the lagging effect of lower rents feeding into owner equivalent rents in the CPI, expect inflation to slowly go down over the next few months.  

As for the jobs market, its hard to keep getting big jobs growth when the working age population is hardly growing.  The post Rona catch up hiring done from 2021 to 2023 is behind us.  Yes, the jobless claims numbers haven't gone up, and NFPs are still showing solid job numbers, but government tax receipts are weak for January, month to date. 

You have seen quite a few layoff announcements this month.  Its nothing alarming, but companies usually don't do layoffs if they think the economy is strong.  

Could it be that the effects of the Covid stimmies are starting to wear off and the lagged effect of 525 bps of rate hikes are starting to slowly kick in?  I heard so much talk about the lagged effect of Fed rate hikes in 2023, but now, when they should start to kick in, its crickets.  Higher interest rates work quickly in the financial economy, but they work slowly in the real economy.  Even if the Fed cuts 125 bps (what is priced into Fed funds futures for 2024), that doesn't really stimulate the economy.  Its just less restrictive.  It wouldn't  keep the stock market from going down, if god forbid, we actually got this bubble market to pop and go down.  125 bps of cuts would still keep real rates positive, and 5 year corporate bonds would still be rolling over at more than 200 bps higher yields than 2019.  

The Fed doesn't usually mess around with 25 bps paper cuts when jobs numbers are getting weak in a disinflationary environment.  The Fed took its time in 2019 to cut because rates weren't that high, and the economy wasn't that weak.  This time around, real rates are much higher, monetary policy much tighter, and I would argue the global economy is weaker now than back then.  Back in 2019, at least you had Europe and China that were relatively strong compared to now.  Those countries help contribute to disinflationary pressures for goods in the US.  

I wouldn't be surprised if the Fed funds rate was below 3% by year end.  That's 250 bps of cuts, most of which would come in the form of 50 bp increments.  I could see the Fed doing 25 bps/meeting for 2 meetings in the spring, realize that its too little as stocks continue going lower, NFPs continue coming in weaker, forcing them to up the pace to 50 bps/meeting until year end.  If they start in May, they could cut 250 bps in 6 meetings in 2024 under that scenario.   I see that as being much more likely than the Fed dot plots of 3 rate cuts for 2024 as the economy just hums along without any worries.  

We got some geopolitical worries hitting the overnight markets as crude oil went up, but has since settled back towards unchanged.  Crude oil already rallied the past few days going into the weekend ahead of potential Middle East risk, so its not that surprising that there was little reaction from crude oil.  After the trauma from higher oil prices in 2022 after the Russian invasion Ukraine, you still see overreactions to any piece of news coming out from the Middle East.  Geopolitics is now always considered a concern for investors, even though it had no real effect for the two decades prior to 2022.  

Its a heavy event week with big tech earnings lined up, QRA and FOMC on Wednesday, and nonfarm payrolls on Friday.  With the SPX in a strong up trend going into these events, I don't expect much selling after any of these events.  If there is a dip, it will be brief and immediately bought up.  As is typical for an event packed week in a strong uptrend, the odds favor the bull side for both stocks and bonds.  I bought some bonds late last week, looking to hold for the next few weeks.  No position in stocks at the moment, but the COT data came out bullish with dealers covering shorts into the rally, and asset managers selling.  It jives with what I am hearing on CNBC, which is skepticism about this rally.  Its going to take time to form a top, definitely not seeing signs of a top yet in the positioning data. 

Split Market

Its a tale of two cities.  The haves and the have nots.  The tech stocks are doing great. The rest of the market has been mediocre.  In particular, small cap stocks have been lagging badly.  Tech stocks are the anointed ones in this environment, as they are valued based on AI hype and its halo effect, while the rest of the stock market has to deal with reality.  The reality is that the fundamentals and lackluster earnings growth don't support higher valuations for most of the market.  

For a big chunk of the Russell 2000, higher yields are a big drag on earnings, as they are less profitable or unprofitable, with weak cash flows, making them more reliant on debt.  The S&P 600 (small caps) has a net debt to EBITDA ratio that's 3 times that of the S&P 500 (large caps). 

There is no free lunch in running the economy hot with big budget deficits.  Higher inflation leads to higher yields which increases the cost of debt capital.  It also leads to higher wages which increases labor costs.  When interest expenses and labor costs go up, that squeezes profit margins, forcing nonprofitable or barely profitable companies to borrow more.  Increasing leverage makes the bottom of the capital stack, equity, riskier, which is reflected in lower stock prices and valuations.  

We've reached a point where the benefits of higher revenues coming from a stronger economy are less than the costs of higher interest and labor expenses.  Its why the stock and bond market correlations have gotten so positive.  This is a symptom of higher inflation coming from fiscal dominance, as expansive fiscal policy initially helps the stock market (2020, 2021), but this leads to tighter monetary policy which ends up hurting the stock market (2022).  When the lagged effect of tighter monetary policy slows down the economy and reduces inflation, the stock market front runs the loosening of monetary policy by going up, even as earnings growth is weak.  This is where we are in the cycle, as stocks front run the rate cut cycle, expecting a soft landing.  But the variable this time are the large budget deficits and the need to keep issuing $2T+ of Treasury debt each year to keep the game going.  The Fed either lets long end rates stay high to keep the economy from overheating and inflation in check, or they go back to QE and low rates to keep the economy from going into recession, risking a resurgence of inflation.  

We are in an interesting spot where the lagged effect of higher rates is hitting small caps and small businesses, while the rich keep getting richer as the SPX goes higher and they collect 5% on their excess cash, most of it coming from the government's huge interest expense.  Its a torturous trickle down effect where the rich with excess cash get paid higher interest from the government and corporations at the expense of small businesses having to pay more interest on their borrowings.  Since the rich are so flush with cash, as stocks keep making new all time highs, and collect lots of interest, that money finds its way into the stock market.  Its a virtuous cycle fed by the government running big deficits.  

So what breaks this virtuous cycle?  A couple of scenarios would do it. 

1. Enough small businesses and small cap companies start cutting back on labor to protect their profit margins, leading to higher unemployment, and less revenues and thus lower earnings.  More corporations have to start feeling the pain from higher interest and labor costs for this to happen.  

2. Inflation makes a comeback, rebounding to higher levels, keeping the Fed from making big rate cuts.  This is what most people seem to fear more than a surge in job losses.  Although my view is that job losses are much more likely than another inflation surge in 2024.  

With the SPX making a big breakout towards new all time highs, investors don't have much concern about either of the above scenarios.  A soft landing is the base case for most.  While there is quite a bit of skepticism about the rally and it going up too far too fast, its based mainly on the belief that the Fed will not cut rates as much as the market expects.  I've written in the past few blog posts about this consensus belief, which I believe will be wrong as the economic data comes in weaker in the coming months.  Since investors are skeptical about the magnitude of the Fed cuts coming, that's a positive catalyst that still remains to fuel this market higher.  You should only consider putting on a longer term short position in US stocks after the consensus starts to buy into the Fed cutting rates more aggressively this year.  There is still that wall of worry out there about rates staying higher for longer.  

We've seen the Russell 2000 lag the SPX badly since the start of the year.  Here's a look at a couple of other times where the Russell 2000 lagged the SPX so much during a strong uptrend.  They both eventually resulted in a sharp correction of 10% within a few months.  

September-October 2014 correction

January-February 2018 correction

Timing these tops is hard, as it takes months of this SPX-RUT divergence to eventually lead to the SPX breaking down.  Things like the Hindenburg Omen which flash warnings of a split market of lots of new 52 week highs and new 52 week lows as the SPX makes new highs have started to fire up.  A couple of them on the Nasdaq composite over the past week.  Along with the high valuations and general complacency out there (low put/call ratios, high CTA equity exposure), a deep correction is waiting in the wings.  The key will be not to get short too early, as momentum in these type of up markets last longer than most people expect.  

SPX is gapping up again, this time to another all time high, as SPX is around 4885 as I write.  Given how effortlessly its gone up since breaking 4800 on Friday, it looks like a break of 5000 is going to happen within the next 30 days.  This bubble reminds me a bit of 2000, when the Nasdaq broke out above 5000, as there was a frenzy for tech stocks.  I distinctly remember semiconductor stocks flying higher in February of 2000, a month before the bubble top.  Right now, semiconductors are the hottest sector in the market.  History doesn't repeat, but it does rhyme. 

Brainwashed by the Fed

If you repeat a lie enough times, eventually people begin to believe it.  That is what the Fed has done with both its higher for longer mantra, and now brainwashing the financial community into believing its dot plot of 3 rate cuts for 2024.  Since when has the Fed been an accurate predictor of future rate moves?  Its counterintuitive, but the STIRs market has been more accurate in predicting future rates than the group that actually makes the interest rate decisions. 

Stocks and bonds are all just one market now.  The correlation can hardly get more positive between the two.  The consensus view is that the STIRs market is pricing in too many rate cuts (150 bps) for 2024.  Its been the recent weakness in the bond market that's infected the stock market, leading to horrible breadth.  Russell 2000 has lagged badly since the start of the year, just as the crowd was warming up to small caps, and expecting them to outperform in 2024.  You are also seeing the VIX make higher highs even though the SPX is hardly going down.  It all looks like a possible perfect storm, but I just don't see it happening.  People are too pessimistic about the rate cut path. 

Investors are worried that the Fed will disappoint the market expectations of 150 bps of cuts this year.  I'm in the minority view that 150 bps is the minimum amount that the Fed will do if there is a no landing scenario (very unlikely given weak global growth in Asia and Europe, lower fiscal impulse in the US).  In a soft or hard landing scenario, the Fed is likely to cut in 50 bps increments, not 25 bps as most expect.  It will only take 3 meetings to get 150 bps of cuts in that case.  That can be done over a period of 3 months.  In past economic slowdowns, the Fed has almost always made chunky rate cuts of at least 50 bps increments.  There is nothing to make me believe that they'll stick with 25 bps moves when unemployment is rising and inflation is falling.  

Fed Funds rate probability for Dec 18 2024 FOMC

Just as rates rising didn't have much of a restrictive effect on the US economy, rates falling won't have much of a stimulative effect.  So I can definitely see a situation where the medicine of a few rate cuts is too weak, forcing the Fed to give the patient even stronger medicine in the form of 50 or 75 bps cuts at a time.  

You see some leading indicators which seem to have bottomed, but much of it is coming from the steepening of the yield curve and reduction in credit spreads, basically financial conditions.  Financial conditions are overrated as an economic leading indicator when there is so much fixed debt outstanding that is unaffected by interest rate/yield moves.  Too many are jumping the gun and trying to front run the turn in the cycle.  There just is not that much pentup demand in manufacturing (inventories not low enough), as we never got the recession cleanse that was needed to restart a strong up cycle.  The excess savings of the bottom 50% is gone (wages not keeping up with inflation), and many have to pay back student loans, which just restarted a few months ago.  

The job market is slowly loosening, with fewer temp work (leads permanent work in the cycle), meaning higher unemployment and fewer wage increases for 2024.  The key is profit margins of small businesses, which are likely getting squeezed as the Rona stimmies are now gone but the higher rates on loans remain.  With lower profit margins at small businesses, they either have to cut workers or reduce working hours.  Both will slowly feed into less wages and lower consumption.  Just looking at how weak the Russell 2000 has been so far this year, as well as for most of 2023 (vs SPX).  That gives you an idea of how smaller companies are doing in this higher rate, higher labor cost environment.  

You likely won't be seeing a recession, just because of the huge government deficits driving nominal GDP growth, but the weakness of small businesses and reticence to make big investments ahead of the maturity wall coming up in 2025 will lead to a noticeable growth slowdown, IMO.  Its being ignored for now because rates came down so hard in November and December, and the stock market went up so much.  Probably the best sector to be invested for the year will be in defensive sectors like consumer staples and utilities, as you are going to get a slower economy leading to chunky rate cuts by the summer, and people are not positioned for that.  The Fed has even stated that even without labor weakness, they will make rate cuts as long as inflation is falling. 

With the recent rise in yields, bonds are getting interesting here for a swing trade, as I don't see yields able to keep rising ahead of a rate cutting cycle which is being underestimated by the majority.  The bond market is sending a strong signal when the yield curve keeps steepening despite the widespread belief among the financial media that too many rate cuts are priced in.  

Because I don't think yields will keep going higher, I am a reluctant short here in SPX.  This trade was mainly a play on the seasonally weak January opex week as well as the somewhat overbought nature of the market last Friday.  I will be looking to close out my short by Friday, as some of the January opex weakness has been brought forward this week.  Also, don't want to hold a short position going into tech earnings season starting next week.  Once we consolidate this month, I am expecting a strong February for stocks and bonds as weaker economic data starts to come in, moving investors more towards my view of a more aggressive rate cutting cycle than is being priced in. 

A Market Made for Ray Dalio

My framework for 2024 is the underestimated Fed dovish pivot.  This makes me bullish risk parity (long stocks and bonds) for the next few weeks, buying on dips in bonds as 10 year yields go above 4%, and when SPX gets down towards 4700.  Downside will be contained until there are more believers in the Fed dovish pivot, and fewer believers of higher for longer in 2024.  It will take several weeks for the migration to play out, as our monkey brains can't handle going from bearish to bullish so quickly.  Many are still in denial in the bond market. 

Its a type of market that Ray Dalio would love.  Collecting 2 and 20 by just holding long bonds along with the SPX, and calling it an all weather portfolio.  

That 10 year yield chart is amazing.  It is what you would say is the mother of all capitulations in US Treasuries.  All you heard was talk about bonds in September and October.  You even had someone on CNBC calling for 13% 10 year yields!  Charts can play mind games on investors.  Past price action really influences how investors view the future.  Its not just about price.  Its about path that changes our views.  Let's play this game on the 10 year yield chart: 

Actual 10 year yield chart since start of 2023

Fake 10 year yield chart since start of 2023: September, October, and November 2023 changed.

I believe most people looking at the first chart would think that the move down in yields is overdone, and that yields are due for a further bounce higher.  Most people looking at the second chart would think that yields made a double top around 4.30% and that yields look to be trending lower.  

These are the mind games that financial markets play on our monkey brains. By simply reversing the psychology and doing the opposite of what feels right can be an edge.  Of course, you need to see how speculators are positioned, as well as what the investment community is thinking to get a bigger edge.  Here is what the latest JP Morgan bond survey shows:  

JP Morgan clients' net long positioning dropped the most over 1 week since 2020.  It only took a 20 bps rise in yields to get bond investors bearish again. 

The bond market has an asymmetric payoff profile at the moment.  Its because of the Fed's new dovish bias and upcoming rate cut cycle.  We know with a fair amount of certainty what core CPI will do over the next few months, because of the lagged effects of owner's equivalent rent (biggest weight in CPI) and other butchered calculations which foreshadow future CPI readings.  With rents having come down a lot in 2023, and owner's equivalent rent lagging real rents, you will likely have core CPI coming in low month over month until the summer.  Some of this is priced in, but the Fed is laser focused on the data, especially data confirming their now dovish bias, so with lower CPI readings, they have an excuse to cut rates.  At 5.33% Fed funds, real rates are quite high, meaning they have a lot of room for rate cuts even if the economy remains steady.  That's the Fed backstop for the bond market right now.  Especially the short to intermediate part of the curve, from 2 yrs to 7 yrs.  

This Fed backstop wasn't present in 2022 or 2023 because the Fed had a hawkish bias due to the zeitgeist on high inflation at the time.  But investors have a hard time turning on a dime.  Especially when a market like the US bond market, has been in a bear market for nearly the past 4 years.  As a result, I see a lot of denial on CNBC and Bloomberg, about future rate cuts.  Many don't think the Fed will cut 5-6 times, like the SOFR curve is pricing in at the moment.  They are still somewhat stuck in the higher for longer theme that the Fed repeatedly bashed into the brains of investors in order to tighten financial conditions.  The consensus I see among the "pros" is similar to the Fed dot plot, which is 75 bps of cuts for 2024.  In my view, 75 bps is the absolute minimum they will do this year, if there is a no landing/delayed landing/inflation rebound scenario.  Even in a consensus soft landing where growth is slowing and jobs numbers are going down, they will cut much more than 3 times, more likely the 5-6 times that the SOFR curve is pricing in.  

Its this denial about the coming fast and furious rate cutting cycle even without a hard landing which makes me nervous about getting short SPX too soon.  Yes, the market went up a lot over the past 2 months, so its likely to consolidate its gains instead of rocketing higher at these high valuations.  But I don't see a lot of downside in the market until the majority of investors abandon their higher for longer bias and accept that the Fed will cut rates even without much of an economic slowdown.  The closer we get to the March FOMC meeting, the more certainty will come to the crowd that this is no longer a "higher for longer" Fed, but a "find any excuse to cut" Fed.  When the consensus of "pros" (not SOFR traders, but loudmouths on CNBC and Bloomberg) shifts to my view on the Fed's rate cutting cycle, that's when I'll be looking to aggressively short SPX.  Until then, I am only willing to play the short side for quick swing trades.  

The broadening out of the stock market rally has already fizzled out.  The Russell 2000 has badly lagged the SPX over the last 2 weeks.  It has given back all of its massive outperformance since the FOMC day rally in mid December, and is now underperforming SPX by over 2% over the past 4 weeks.  

This has made me revise my view on how the next few months play out.  I was expecting a chase for high beta in small caps for the first quarter but that doesn't look like its going to happen.  Instead, we are likely to see you typical grind higher with breadth deteriorating towards a final top, as the economy slowly weakens.  The economy is just not strong enough to justify rampant speculation in small caps, many of which are nonprofitable and/or have weak balance sheets.  So no blowoff top with a big move higher in Q1.  Its going to be your typical grind it out top, with no climax moments.  That's going to make timing the top a bit tricky, as these grind it out tops take longer to play out, and are more frustrating to trade.  Going into the year, I was thinking March as the month that the market makes a climactic top.  But now, its probably April or even May when it makes a meat grinder of a top.  

Still long SPX, but trimmed some yesterday and will likely sell the rest today.  I put on a long position in Treasuries for a short term trade going into today's CPI, which I will close out either later today or tomorrow.  Anything above 4% 10 year yields is a low risk long entry point at this juncture.  If the CPI comes in lower than expectations, I may begin to put on SPX shorts, as SPX 4800 is going to be tough resistance as its near all time high territory, and the chart looks short term overextended. 

Wingsuit Landing

Everyone is talking about a soft landing.  It is the zeitgeist of the moment.  The current environment reminds me of those wingsuit jumpers who dive off cliffs and high places, gliding down like a  flying squirrel.  It looks way more fun than your ordinary sky diver who just drops straight down towards the ground.  I actually don’t have a strong argument against a soft landing.  The ingredients for a soft landing are present:

1.  Large budget deficits (6-7% of GDP) in a low unemployment environment.

2.  Energy and commodity prices which are stable to lower.

3.  Fed policy pivoting to preemptive rate cuts in a non-recessionary economy.

4.  Inventories de-stocked to normal levels.

5.  Strong balance sheet for the top 50% as home prices remain high, and most have low rate mortgages from 2020-2021 refis.

With everyone focused on the short term, macro is always at the forefront.  Thus, this soft landing thesis is talked about quite often.  Based on my read of sellside research reports and listening to CNBC and Bloomberg, the consensus for 2024 is a soft landing, with a lean towards weak growth.  This is not the kind of backdrop that usually forms bubbles, but here we are.  The SPX forward P/E ratio is the highest outside of the 2021 everything bubble period over the past 20 years.  This is with Fed funds rate at 5.33%, with a 10 year yield close to 4%. 

With all the talk about a soft landing and the Fed’s dovish pivot, investors are forgetting about price.  The most important part of the market.  The stock market is richly valued.  This is for a developed economy with a naturally low growth rate.  Without lots of fiscal stimulus, the US economy cannot grow much.  If you do have a lot of fiscal stimulus, inflation will be high, causing long term yields to go higher, which lowers the present value of future cash flows.   Its almost a no win situation for the stock market at current valuations.  Unless we are at a permanently high plateau for stock valuations, buying the SPX today will underperform cash sitting in a money market fund for the next several years.  You cannot totally eliminate the possibility of being at a permanently high plateau.  Anything is possible.  But a permanently high plateau for valuations would be the first time ever in US stock market history.  And given the historically high equity allocations among households and an aging demographic, its very likely that equity allocations go down, especially with bonds now offering decent yields.  

The stock market is not the economy.  But you would think it is based on what you hear on CNBC.  Its the backdrop for almost every conversation about the market.  In October 1987, when the Dow crashed 19% in one day, the US was not in a recession.  GDP growth was strong.  In February 2018, when the VIX went from 14 to 50 in 3 days, the US was not in a recession.  GDP growth was strong.  Stocks can go down hard and the VIX can spike without a weakening economy.  The common trigger for these sharp drops in stocks is a big run up higher into all time highs and rich valuations.  The current setup is not quite there yet, as the SPX has not hit an all time high, and the run up is not as steep as 1987 or 2018.  But if the SPX keeps rallying for the next few months, the setup will be ripe for a sharp drop and a vol explosion.  It won’t be as dramatic as 1987 or 2018, because the rise is unlikely to be so steep.  But it will cause some damage.  More than March 2023.  More than October 2023.  

2024, being an election year, will have a lot of political headlines which will be a convenient rationalization for any selloffs.  Don’t buy into any of it.  The winner of the election, whoever it is, will not be able to cut spending.  They will not be able to raise taxes.  That’s all that matters for the market.  The stock market loves the government overspending while cutting/not raising taxes.  Rising budget deficits are a boon for stocks.  No matter how much the permabears spin it as a negative.  There will be no fiscal austerity, even if the bond vigilantes have a fit.  Congress and the White House didn’t even blink an eye when the 30 year yield went from 4% to 5% last fall.  Nothing will stop the deluge of Treasury issuance.  Nothing.  

Sure, the market hates uncertainty, and there is a subset of chicken little investors who think Trump will hurt the market.  But after what they’ve seen of Trump and Biden the past 8 years, the election will be viewed a positive catalyst in their eyes, not a negative.  This Goldilocks theme based on a soft landing, Powell dovish pivot, and the near certainty of more government cowbell with either Trump or Biden winning in November, what is there to fear?  Mainly one thing: the return of inflation and the ghost of Arthur Burns.  An economic slowdown is not the real fear.  It can be dealt with by bazooka stimmies from the Fed and US government.  The real fear is inflation picking up again during the Fed cutting cycle.  Commodities are underpriced compared to the growth of the money supply over the past 4 years.  It won’t take much for inflation to surge back up on the back of higher food and energy prices and a weaker dollar.  

In a low inflation environment, like what you had from 2000-2020, bonds are the best hedge for equity downside.  In a high inflation environment, like what you have since 2021, commodities are the best hedge for equity downside.  As the economy gets more financialized, like the US, stocks and bonds become more positively correlated, so bonds become a poor hedge for stocks.  This will lead to more volatile markets than in the past, because of that lack of hedge from the fixed income side. But the current market is pricing volatility as if it was a similar environment to the 2010s, when you had bonds act as a positive carry risk off hedge, when that's no longer the case.  2022 was a wake up call.  Inflation is a bigger long term problem than a potential recession from higher rates.  

We are getting a nasty little pullback off the end of year rally, as the post FOMC day gains have all been erased.  I started a long in SPX slightly above 4700, thinking that the bulls would defend that zone, but it fell easily.  This is just a short term trade, and it still has merit, because I don't see a sustained selloff in bonds at the moment.  But I won't hold this for more than a week or two at the most.  Once again, stocks have a hard time rallying when yields are going higher.  Ten year yields are back above 4%.  Nothing has changed.  The bond market is in control here.  

After this pullback in bonds from the year end rally, I am neutral to positive for the next few weeks due to the impending rate cut cycle, seasonal weakness in most commodity markets, and the skepticism that I see among Wall St forecasters who still think too many rate cuts are priced into the SOFR curve.  It is this wall of worry about higher for longer that the stock and bond market will likely be climbing for the next couple of months.  This makes me more constructive on stocks as well, since the stock and bond markets are connected at the hip these days.  

 We have nonfarm payrolls and apparently the higher than expected ADP number and lower than expected jobless claims numbers have both bond and stock investors nervous.  These economic data releases are overblown in their importance, so I wouldn't jump to any conclusions based on this jobs number.  Powell seems hellbent on going for a soft landing so he'll ignore strong data and cling to anything supporting rate cuts, like lower CPI, lower job openings, etc.  Its all about politics now for the Fed, even though most people will think that's just a conspiracy theory. 

The Fed will find almost any excuse to cut rates this year.  Those clinging to the higher for longer thesis are playing last year's playbook.  This year will be the year of Powell the "Caveman Lawyer".  Eventually the SPX will form a long lasting top, once you get the majority of investors to completely buy into the coming fast and furious rate cut cycle.  It probably will take a few more hints from Powell and company for the message to be understood, loud and clear:  they are coming with preemptive rate cuts to prop up Biden and stop Trump.  I could care less who wins in 2024.  But the Fed is definitely going to be rooting for Biden and helping him out as much as possible.  Powell and Yellen are on the same team now.