Bonds Are Not Buying It
What is it?
“The market rallied on the story that the debt ceiling impasse will be solved ahead of X Day on June 1st.”*
However, it seems like there is a disconnect between the optimism in equities. The bond market has not reacted the same way.
“Interestingly, through this whole debt ceiling debacle, volatility has barely budged despite some legitimate concerns the U.S. could technically default. So, either equity risk (as measured by volatility) is missing something, or it has nailed that things will eventually get resolved.”*
Why does it matter?
While the equity markets could be right, they may be too focused on the debt ceiling relief as opposed to what comes after that. There could be less liquidity in the markets even if the debt ceiling is resolved which may bring equities down more than some estimates are pricing in. If investors were more confident, then markets would be noticeably higher as opposed to moving up for one day just to remain there or fall back down the next day.
The Market is Slightly Optimistic
What is it?
With equities inching higher, some investors expect the Fed to cut interest rates within a year. However, as of now the Fed says they plan on keeping rates higher for longer.
Why does it matter?
While the market has maintained its value in recent weeks, price action has not shown much conviction to make a move higher. There has not been a definitive move higher or lower in terms of the broader stock market. The recent consolidation may be from investors not wanting to make definitive investments to either buy in or sell out of the market.
The market is only really buying into the top tech names while almost everything else is suffering year to date. There is not much optimism outside of the largest stocks that have been weathering the storm of higher interest rates. We are maintaining a risk off approach in our tactical portfolios while participating in certain investments as we see fit.
Other articles we found interesting this week:
Bitcoin-Ether Correlation Weakest Since 2021, Hints at Regime Change in Crypto Market
Japan’s stock market is smoking the S&P 500. Is it too late to jump in?
Struggling Chains That May Not Make It to 2024
Current 401(k) portfolio
Our last 401(k) portfolio reallocation: 5/19/2022.
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Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.
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Sources:
*Keith McCullough. “Early Look – Toiling For Wealth”. 5/18/2023. Hedgeye Risk Management. https://app.hedgeye.com/
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