The Great Elastic Band Still Points South

For major equity markets, it was a very strong rally at first through Europe, and then into New York.

Nevertheless, the end of day looked a little tired in New York trading.

This is because traders seemed to want to simply forget the terrible re-acceleration of inflation, producer prices and then the PCE that we have just seen. As if they were suddenly yesterday’s news.

Perhaps, throughout the history of markets, it has never been easier for traders and investors to believe, whatever it is they want to believe. Much the same as is the case across all forms of human endeavour now with the algorithmic feeds of social media.

This allows for great disconnect moments, between reality and whatever is hoped for, to be even larger than was previously the case. Many of us have noted how the elastic band between sentiment and reality in the typical vagaries of markets, has, well, seemed to have just gotten that much longer in recent years.

Markets can now run on sentiment, ignoring Main Street, and even financial realities, to an unprecedented degree.

Whereas historically markets trended reasonably reliably, with chaos largely confined to corrective and consolidation periods, chaos of market price action is now a 24/5 characteristic. Of even the world’s largest markets.

This perspective entirely captures the much larger price swings, regardless of the direction of the underlying dominant trend, we have been seeing. Particularly, over just this past year.

It has been as if markets just go to yet another quantum of volatility every two years or so, since around 2018.

This brings us to the present, So far in 2023 we have seen a quite relentless rally in equities against constant reinforcement by the Federal Reserve that they will continue to raise rates.

The sentiment being that there would be a pivot. That we would see the Federal Reserve cutting rates this year. Perhaps aggressively. Yet, there has been very little justification in the economic data, or what is happening on Main Street to suggest this would be the case.

The only seeming support of this view, was simply that other people were saying it too, and therefore we are encouraged and must be right?

This is why, I always forecast that this early up-trend of 2023 was not sustainable. It was simply a stretching of sentiment away from the true fundamentals. Perfectly normal, but in this case, it went on for a very long time.

Now, that the market has turned down, as it should against a backdrop of at least below-trend, if not negative US growth this year, and a Fed that will continue hiking, there is again a tendency out there in sentiment world to almost immediately after further confirmation that the Fed will be hiking rates for a very long time still, to quickly dismiss this reality yet again?

What we saw in a microcosm yesterday, in New York trading, is what I believe we will see in the weeks and months ahead in the ‘bigger picture’ of economic reality, sentiment, and where markets generally go through the rest of 2023.

That is, a ‘let’s forget and just buy’ sentiment bravado, followed at some point by a running into a wall of selling, from people who trade the true fundamental outlook.

This makes as I said for very volatile, at times chaotic price action, but the market is more likely to end the next 6-18 months lower, rather than higher.

Both bulls and bears need to be patient in these wild swinging markets, but I prefer to remain a bear and play good portfolio defence for the foreseeable future.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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