Small Ball Time?
“Every hard landing initially looks like a soft landing, and glass-half-full risk markets (such as equities), normally assume the best. That sets up an asymmetry heading into 2024: if the landing is soft, it’s in the price; if it’s hard, it’s not priced.” -Gerard Minack, author of the Down Under Daily.
“Frankly, the Fed has won the battle of the American consumer—they are slowing down. The question is what happens next.” -Bank of America CEO, Brian Moynihan.
Small Ball Time?
In some of my podcast appearances this year, I’ve opined that the latest in a long series of bubbles is now in complacency. The market’s insouciance in the face of the kinetic wars in Ukraine and Gaza is a prime example of that relaxed attitude. There seems to be little concern that these, especially the latter, have the potential to suck in the Western powers.
The market’s focus currently seems to be much more on the possibility of year-end rallies in both stocks and bonds. The catalyst for the rebound this week is the perceived finale for the Fed’s aggressive rate-hiking crusade. Conveniently ignored is the ongoing shrinkage of its balance sheet, QT, or, Quantitative Tightening. The fact that its already monumental rate increases are still filtering through the economy and financial system is also being overlooked.
Actually, I don’t question the likelihood of a near-term rally, as I’ve written previously. It’s the durability of any such bounce about which I have my doubts. For now, though, it’s been a pleasant recovery for almost every type of risk assets.
On that point, last week’s discussion of emerging market debt turned out to be serendipitous. Most investors are probably unaware that the two closed-end funds highlighted last Friday have out-legged the S&P this week, up an average of 6½% between them.