Be cautious buying this uptrend, and be especially cautious trying to catch the bottom of a mediocre company in a downtrend. I don't view the current environment to be fully risk off or fully risk on, but showing signs of the last leg of the business cycle. My preference is to target 20-30% cash and focus on companies with a high sharpe ratio, and lower dependence on debt.
The market has had a nice uptrend, but there is a consistent pattern of trend reversals after FOMC updates. The fed delivers a message and the market reacts. Then the market begins to shift the narrative in between meetings, only to be caught off guard by the fed remaining on course for inflation.
I personally expect the fed to separate price stability from banking stability and remain on the tightening path with a 25bps increase. However, a pause in rates will likely mark the top of the rate cycle. In this chart we see the following business cycle trends:
• Local bottoms in global net liquidity signal local bottoms in risk assets (Oct 2022)
• The last leg of the cycle starts when the market for 2yr bonds rolls over fed funds and remains there (remains there being the key). This makes the current rate decision meaningful.
• The market can continue 20-40% upward movement for 15-30 months until experiencing a credit crisis
• Market bottoms are confirmed once maximum unemployment is reached
• Maximum unemployment is observed to be 24-36 months from the double top of core inflation (Mar 2022)
While every business cycle is unique, monetary and fiscal policy tend to adjust to conditions with similar tactics and in similar time frames. I will continue to move my assumptions outward if rate increases continue.
SPX
FEDFUNDS
The market has had a nice uptrend, but there is a consistent pattern of trend reversals after FOMC updates. The fed delivers a message and the market reacts. Then the market begins to shift the narrative in between meetings, only to be caught off guard by the fed remaining on course for inflation.
I personally expect the fed to separate price stability from banking stability and remain on the tightening path with a 25bps increase. However, a pause in rates will likely mark the top of the rate cycle. In this chart we see the following business cycle trends:
• Local bottoms in global net liquidity signal local bottoms in risk assets (Oct 2022)
• The last leg of the cycle starts when the market for 2yr bonds rolls over fed funds and remains there (remains there being the key). This makes the current rate decision meaningful.
• The market can continue 20-40% upward movement for 15-30 months until experiencing a credit crisis
• Market bottoms are confirmed once maximum unemployment is reached
• Maximum unemployment is observed to be 24-36 months from the double top of core inflation (Mar 2022)
While every business cycle is unique, monetary and fiscal policy tend to adjust to conditions with similar tactics and in similar time frames. I will continue to move my assumptions outward if rate increases continue.
SPX
FEDFUNDS
Comment:
Just sharing an update to this with the outlook for the next few months.
