Reverse The Wealth Effect And Crash Stocks To Save The System
This Is A Different Phase
If you look at the performance of stocks and bonds year-to-date, the S&P 500 is off ~4% from its high earlier this year, but long-term Treasuries have also been in a steady state of decline over the same time period.
The explanation figures to be pretty straightforward. The latest monthly inflation readings have been ticking higher. Retail sales figures, especially the March number released earlier this week, continue to be strong, supporting the higher inflation/higher growth narrative. Therefore, the Fed rate cutting cycle keeps getting pushed back to the point where it’s entirely possible we don’t get a single rate cut in 2024. There could also be some anticipation for the BoJ dumping Treasuries to save the yen getting baked in here as well.
What that’s resulted in in market terms is a similar pattern to what we saw in 2022 - stocks and bonds declining at the same time. We really haven’t seen the VIX move higher than 18, so there’s no panic yet and everything seems to be moving in an orderly fashion, but most of the traditional market risk ratios - low vol/high beta, utilities/S&P 500, lumber/gold, VVIX/VIX - suggest that there’s a lot of risk-off behavior in the markets right now.
And a lot of it is built around this idea that inflation is re-accelerating and the Fed will be unable to cut rates.
That’s likely true on the surface, but to get a sense of where things might be going, we have to look at the factors that have gone into where we are now.
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