The weekly market reports include a market position update, a stock market forecast, and an analysis of capital markets. To access the full report, you must subscribe to Premium Articles, Weekly Premium Articles, or an All-in-One subscription.
Included in this report:
- Weekly summary.
- Macro Contradictions.
- Market positioning update.
- Stock market forecast.
- Capital markets analysis.
1. Weekly Summary (July 1–July 5, 2024)
- Stocks (SPY) gained 1.9% to new all-time highs due to dovish comments made by central bank officials, and they have been overbought for three days in a row.
- Market breadth worsened, with the equal-weighted S&P 500 index falling 0.4% for the week.
- Bonds (TLT) rebounded 1.2% following expectations of lower rates in September.
- Commodities (DBC) gained 2.4% amid a broad-based rally. Gold gained 2.8% during the week.
- The US dollar index (UUP) ended the week down 0.9%.
- Gold (GLD) has outperformed stocks (SPY) since January 3, 2022, with a return of 29.2% versus 21.2%, respectively.
- Since January 3, 2022, bonds (TLT) have been down 32.5%, while large-caps (SPY) have gained 21.2%.
- The equally-weighted magnificent six stocks gained 4.9% for the week and are up 67.6% year-to-date.
- The consumer discretionary sector (XLY) gained the most this week, by 3.8%. The energy sector (XLE) fell the most, by 1.2%.
- Overall, all assets experienced an increase due to a declining US dollar and rising expectations of rate cuts in September.
2. Macro Contradictions
The unemployment rate has risen to 4.1% from a low of 3.4% in January 2023. At the same time, the inflation rate has been moving above 3% for the last 12 months. The real PCE, which is allegedly the Fed’s preferred inflation measure, has remained above 2% in the same period. The annualized GDP is at 1.4% (not shown on the graph below). The Fed has kept interest rates at an average of 5.33%. Why should the Fed cut interest rates?
There is no shortage of arguments on the financial mainstream and social media in favor of or against interest rate cuts. We went from seven cuts for this year to one cut in December, and now to a September cut. Despite the uncertainty, all the twisted logic, and the rise and fall of some macroeconomic analysis gods, a few facts remain: The CPI continues to show inflation that is well above 2%, and the Fed has not made any cuts. The Fed has two mandates, they claim: low inflation and low unemployment. Historically, these two mandates have clashed: lowering inflation required a higher unemployment rate. According to many economists and analysts, the new economics asserts that this relationship is no longer valid in the current regime, or, in other words, “this time is different.” The latest arguments center around the notion that a 4.1% unemployment rate is high enough to trigger rate cuts. But what about inflation? “Inflation will fall; wait and see.”
Very few are talking about the fact that a new CPI uptrend has emerged, which is 12% above the previous uptrend established after the GFC. The focus is on the inflation rate, but there is no consideration of the impact of sustained higher price levels on the economy.
The Fed delayed raising interest rates for a year using the “transitory” excuse. As a result, inflation has risen 19.4% in the last 39 months. The stock market has enjoyed a generous repricing due to the new CPI uptrend, with the S&P 500 index rising 16.7% year-to-date. The magnificent six stocks (AAPL, MSFT, META, GOOGL, NVDA, and AMZN) are up 67.6% year-to-date on an equal-weight basis, while the equal-weight S&P 500 is up just 3.7%.
The decline in market breadth has been stunning. Yet, despite higher rates and persistent inflation above 3%, the six magnificent stocks have benefited from the AI narrative. The public debt has been skyrocketing as a result of deficit spending.
The objective of these weekly reports is not to impress the reader with fancy terminology but to focus on the following two facts:
- Macroeconomic analysis is a topic filled with contradictions.
- Contradictions usually benefit the stock market.
When everything is clear, prices remain sideways or even fall due to efficiency. Uncertainty is a driver of greed. Most macroeconomic analyses reflect wishful thinking and political biases, but no one needs them to invest in the stock market. Passive investors certainly do not care, especially those who view corrections and bear markets as unique opportunities to average down. Market timers with strategies that generate reasonable risk-adjusted returns do not care. So, who cares? It is the people who want to “know the truth.” However, trying to discover the truth hidden in contradictions may be intellectually challenging but not necessary for investing in the markets. In this game of guessing, the heroes of the past turn out to be the losers of tomorrow. Before trying to make guesses about outcomes, one must understand the game. But the game is not well defined. People think they understand it because they underestimate its complexity. Complexity is a penalty function for naïve interpretations of reality.
3. Market positioning update
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Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. All charts in this report are for informational purposes only. See the disclaimer for more information.
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Charting and backtesting program: Amibroker. Data provider: Norgate Data
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