Stock Investors Yield to Bond Bulls

As our Central Bank began fighting 40-year high inflation in early 2022, stocks peaked, and cash became king. Rising interest rates sent equity valuations lower as investors moved to money market funds, now yielding a risk-free 5.4%. The broad stock market continued to languish in purgatory this year apart from cash rich mega cap tech companies – now known as the Magnificent Seven in homage to the 1960 movie. Cash is still attractive today since the Fed is months if not quarters away from lowering short-term yields. Consumer spending growth has slowed from inflationary rates above 10% to a more normalized 5 to 6% today. Once Personal Consumption growth falls into the historical 3 to 5% range, interest rates should begin to fall more precipitously and set the table for a much broader stock market rally later in 2024. Should spending expand less than 2%, the economy would be flying at “stall speed” and the Fed would be forced to stimulate ahead of schedule. However, the odds still favor economic and earnings growth rate that can avoid a hard landing.

The Q3 economy (GDP) grew at a surprising 5% rate. This triggered a 3-month stock market correction on renewed inflation fears that even the mega cap stocks could not ignore. While the economy remains healthy, the Q3 growth was a climax period which is being followed by modestly slower consumption trends in Q4. Peak GDP also means peak interest rates. When rate hike sentiment topped in late October, investors reversed course with a short-term buying frenzy across most stock market sectors as yields reversed lower to their mean. According to, when the first Marty Zweig breadth thrust occurs (10-day e.m.a. of the NYSE Advance-Decline cycles from <40% to >61.5% within 10 sessions), one week and one-month afterwards the win rate is 92%. Positive returns occur 100% of the time after 6 and 12 months. 

Even the beleaguered small cap segment seems to have found a base with a bevy of breadth surges. When the small cap Russell index has moved from extreme oversold to extreme overbought as it has recently, it has always correlated with further gains 3 months later. Despite a strong 11% rally over the past 3 weeks, small cap stocks remain a whopping 27% below their November 2021 Bull market peak. When consumer spending growth falls solidly below 5% expansion rates, interest rates should fall faster as investor confidence in near-term Federal Reserve rates would rise. A one percentage point drop in yields could generate double digit returns, which offers fair competition from Bond Bulls for investor fund flows.

The Labor data is inching slowly toward normality where we can contemplate rising unemployment. A move into our red zone below would imply wage inflation is falling and the Fed can finally state publicly that inflation is no longer a concern. Such news will be embraced enthusiastically by money managers, yet it may soon thereafter be followed by false concerns of a severe labor recession.

Seasonal patterns continue to map out price trends and inflection dates better than one should expect. Our indicators and seasonality turned us Bearish at the end of July and the outlook remained negative until October, as forecasted. The only surprise has been the amplitude of equity correction in late October. However, that aberration to the downside into October 27th has been more than made up by the near record number of upward breadth thrusts among many stock indices. These thrusts occur most often when leaving a major equity Bear market bottom at the end of an economic recession. This adds to a long list that maintains our Bullish outlook longer term. However, the cornucopia of ebullient forecasts for a melt up rally through year end appears overblown as we expect an early December top near 4600 – 4700 for the SP and a more muted year end as a new trading range begins. Investors can stay with 5.4% yields for up to 20% of the portfolio with the rest spread out in a barbell of technology on one end and undervalued healthcare, financials and utilities on the other. Our Bearish stance on energy the past 2 months has been vindicated, but the mid $60’s to low $70’s in Oil prices this winter should offer an opportunity for new investments. Longer term the backlog of excess stimulus, tight labor conditions and ample sideline liquidity continue to bolster our view of a normalizing economy that can avoid a labor recession. The data also supports a large trading range market for the general stock market that will eventually bust out to record highs later in 2024.


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