The spectacular bull market that resumed in mid-October has continued into the first 9-weeks of 2024. True, Nvidia at 919, Meta at 500 and Microsoft at 415 have all been catapulted from Wall Street to Valhalla (the abode of the Nordic Gods!) but Apple is down 14% in 2024 at 172 and Tesla at 177 are not exactly looking all that hot as they did before they were cast out of the Mag-7, who accounted for two thirds of the S&P 500’s 24% return in 2023.
Valuations are never a timing indicator but 21 times forward earnings for 11% EPS growth seems nosebleed to me since the average forward earnings valuation metric for the past decade is closer to 16X and one of the narrowest market leaderships I have seen in my life in the financial markets is now trading with a Volatility Index at 13.50. I am no Cassandra but it does seem as if risk markets are priced to perfection. The jobs data on Friday does nothing to dispel Mr. Market’s conviction that the economy could well replicate 2023’s 2.5% GDP growth, strong wage gains and consumer spending.
After all, Bidenomics is all about fiscal largesse and a $1.5 trillion Uncle Sam deficit on the eve of a contested Presidential election in November is not exactly an argument for macro stability. Even though the volatility metrics, King Dollar, bond yields and risk premia have not yet gone ballistic though $70,000 Bitcoin and $2200 per ounce gold tell me that someone other than global central banks are worried about the $36 trillion US national debt and the macro demons that lurk in the twilight zone. One thing is for certain, the big money will be made or lost when brutal sector rotation unnerves the market though I would not rule out a 12-15% index correction at any time now. A Fed rate cut at the March or May FOMC with 3.2% CPI, dream on.
The rise in housing cost and “supercore” metrics in the February CPI data demonstrate that the disinflation trend, while real, has hit a speed breaker that will prevent any immediate or aggressive Fed rate cut. This is why the FOMC will remain data dependent and thus the March 20 projections for the FOMC’s inflation, interest rates and the economy will be a market moving event.
The Fed’s monetary policy path has become more uncertain after the inflation scare of Jan and Feb has done nothing to reduce this angst even though the data did not amplify it but skating on thin ice can be highly dangerous and I would rather be safe than sorry when any stock or asset exceeds my rational valuation metrics.
I see a tangible risk now that the Fed will be more hawkish on the future path of inflation than the Wall Street consensus anticipates since there is clear cognitive dissonance between strong data and the 70% odds of a Fed rate cut at the June FOMC. So my default stance would be to look for the 10 year US Treasury bond yield to climb from its current 4.18% to test its recent highs above 4.35%. This could trigger higher vols and flows into energy, industrials and financials. Ouch alert!
Also published on Medium.
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