Edition #186

Premium Market Analysis

Investors,

It feels like the market is reaching an important inflection point, one which will have strong implications in either direction. Financial markets are telling us one thing, while the fundamental economic data is telling us another. Markets are rallying substantially based on rising disinflationary expectations and continued evidence of a weakening economy. It makes sense why the former is causing markets to rally, while the latter does not (i.e. how would a recession benefit stock prices fundamentally, other than an eventual shift towards monetary stimulus?). Either way, the market seems to believe that the Fed’s monetary policy is helping to facilitate an economic slowdown, which will theoretically halt inflation.

This inflection point is dependent on inflation dynamics, which will therefore impact yields and asset prices. The rising inflationary pressures we’ve seen, particularly in 2022, have caused yields to rise and increase the aggressive nature of monetary policy. In turn, asset prices have entered deep bear markets. This is the exact scenario I warned about in my “Investment Outlook for 2022”:

“If the Fed is forced to tighten monetary policy more hastily, caused by relentless inflationary pressures, I believe asset prices could face worse-than-expected returns.”

The Nasdaq-100 has fallen more in this bear market than it did during the COVID crash, driven entirely by the historic acceleration in inflation, yields, and monetary tightening. Therefore, if we want to fundamentally become bullish on asset prices, we’ll need to see a material & sustained downturn in inflation that would allow the Fed to take their foot of the gas pedal, causing a decrease in yields. Interestingly, we’re currently witnessing “smart money” in financial markets indicate that inflation has peaked prior to any material evidence that inflation is slowing down or peaking.

This dynamic will be the focus of today’s newsletter, exploring the divergence in economic data & financial markets in order to identify the key questions and factors that are on my mind.