I see the younger generation hampered by the need to understand and rationalize why something should go up or down. Usually, by the time that becomes self-evident, the move is already over. When I got into the business, there was so little information on fundamentals, and what little information one could get was largely imperfect. We learned just to go with the chart. Why work when Mr. Market can do it for you? These days, there are many more deep intellectuals in the business, and that, coupled with the explosion of information on the Internet, creates an illusion that there is an explanation for everything and that the primary tast is simply to find that explanation. As a result, technical analysis is at the bottom of the study list for many of the younger generation, particularly since the skill often requires them to close their eyes and trust price action. The pain of gain is just too overwhelming to bear. Paul Tudor Jones
The Fed pivot is NOT bearish
If there’s one thing that the post-pandemic markets has reinforced it’s – “strong opinions, loosely held”. Having conviction so you can bet big AND being flexible to alternative scenarios (so you can pivot quickly to the right trades) has been the key to attacking today’s markets. I say this because the current market dynamics have been anything but typical and it has been hard to remain unbiased with the mountains of data that, on the surface, seems like it makes sense but are all based on backward looking historical analyses.
One such conclusion by market pundits is that a Fed pivot is bad news for stocks as it means there’s trouble and there are numerous historical analogues supporting this. I have seen a gazillion tables such as this one below. What they don’t tell you is that the sample size can be counted by two hands (its statistically not significant enough to draw conclusions) and that there are many historical exceptions to this as well. Also, if it were that easy then everybody would be rich. Historical statistics are just a small part of analyzing the market.
Non-recessionary (aka. soft landing) rate cuts are bullish as it improves liquidity supporting the economy and the markets.
Also the reaction of Dr. Market says it all. Bob Elliot, former executive of Bridgewater Associates, summarizes it well in this tweet.
Coordinated global easing
The Fed pivot was what everybody was waiting for to do their own easing.
Why are they doing this? Well, it’s quite simple. Inflation getting back under control (for now) gives them the green light. The bigger picture reason is that governments have accumulated mountains of debt after the COVID-19 pandemic and high interest rates are putting the fiscal picture into a clearly unsustainable direction. Quite literally they can’t afford a hard landing as it means tax receipts will collapse, fiscal deficits explode even higher and debt accumulation goes parabolic.
The solution to this for governments is quite clearly to inflate their way out of the problem and that means to print more money to spend, spend spend! Is this another policy error that makes inflation rear its ugly head once again? Maybe but because of the aforementioned factors, central banks are likely to ignore it as long as they possible can and so stocks and other inflation hedges like Gold are going to continue appreciating first.
Where are we today?
My analysis backed up by Dr. Market thinks that we may be at the latter half of Stage 2.
What trades am I watching?
In the US market, I am seeing a rotation from the defensive Magnificent 7 and the AI stocks to the rest of the market which has severely underperformed since the Fed raised rates in 2022. My preferred trades are long small cap (via $IWM or $TNA), financials (via $KRE, $XLF or $FAS).
In commodities, I am still bullish on precious metals. My preferred trades are long Gold and Silver miners (via $GDX, $JNUG or $SIL) and long Silver (via $SLV).
In Emerging Markets, I am expecting ASEAN including Philippines to exit its lost decade. I also see China making a generational bottom already as the PBOJ has signaled that it has reached its “whatever it takes” moment to exit the deflationary spiral that they are in.
As for thematic plays, here is what I find the juiciest today:
Long Uranium ($U.UN) and related stocks ($URA, $URNM) as Mag 7 companies are pouring cash to nuclear to power their AI dreams
Long PGM related stocks ($IMPUY, $SBSW) as hybrid and ICE vehicles get back market share from EVs