S&P 500 Has Become a Punching Bag for Sellers
And they have hit hard at every opportunity for a week now.
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Our View
Rather than me doing the View today I'll let Howard Marks for Oak Tree do it. He has been around for over 50 years and is an extremely bright man. His piece is called Sea Change, with a few key excerpts below:
In my 53 years in the investment world, I’ve seen a number of economic cycles, pendulum swings, manias and panics, bubbles and crashes, but I remember only two real sea changes. I think we may be in the midst of a third one today.
What are the factors that gave rise to investors’ success over the last 40 years? We saw major contributions from (a) the economic growth and preeminence of the U.S.; (b) the incredible performance of our greatest companies; (c) gains in technology, productivity and management techniques; and (d) the benefits of globalization. However, I’d be surprised if 40 years of declining interest rates didn’t play the greatest role of all.
Inflation and interest rates are highly likely to remain the dominant considerations influencing the investment environment for the next several years…The course of interest rates will largely be determined by the Fed’s progress in bringing inflation under control. If rates go much higher in that process, they’re likely to come back down afterward, but no one can predict the timing or the extent of the decrease…
I believe that the base interest rate over the next several years is more likely to average 2-4% (i.e., not far from where it is now) than 0-2%...But, for me, the bottom line is that highly stimulative rates are likely not in the cards for the next several years, barring a serious recession from which we need rescuing.
Our Lean — Danny’s Take
All rallies are being sold — clearly — and we are seeing the effects of the end-of-the-year asset allocation we talked about in Monday’s lean.
We had that huge bearish reversal on Tuesday (the CPI print), then four straight days where sellers dominated the tape.
There have been opportunities on the long side, with four rallies in excess of 10% (and two of those were almost 20%) this year. However, the overall trend has been down all year as the Fed continues to hold its hawkish stance.
The #KISS of this all is, don’t fight the Fed and how many times have I said, “I’m not here to fight city hall?” There’s too much tightening out there — from the Fed, BoE, ECB, BoJ, etc. — for the bulls to fight.
My friend David Zimmer recently wrote:
Powell just got a bonus in the inflation fight. Japan announced it will issue around 35.5 trillion yen ($258.52 billion) in new government bonds for the fiscal 2023/24 annual budget, adding to the industrial world’s heaviest public debt. More importantly The Bank of Japan just tweaked its ultra-dovish policy setting the stage for a pivot; Japan may be getting ready to tighten. Everything from reassessing its target inflation rate to widening its range on interest rate yields is on the table. Japan’s debt markets were limit down on the move and their equity futures down as much as 3.0%. On our side of the globe, whereas in situations of this nature, while you would often see a “flight to quality” instead you are seeing US debt instruments sell off, the Dollar trading lower and equity futures continuing their slide albeit all off their bottoms as this is being posted.
Our Lean: