The Market: Change in Character
The Market: Change in Character
Equities are beginning to heed the growth slowdown message from cyclical sectors. This is in fact bullish, as it engages the FEDeral Government Put. But on tactical watch for circa SPY $518.
Disclaimer: For informational purposes only.
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Discussion
At least in the very short term, there is a subtle-yet-important change in cross-asset market behavior going on right now: TIPS 30s are currently trading around 217, just above the levels that drove SPY to its ATH in May; yet IG CDX is quietly moving higher despite lower rates and rate cut optimism, and SPY is below its ATH. Given the asymmetry of SPY behavior since late last year - where all it took was rates backing off for SPY to reaccelerate to new highs - the fact SPY hasn’t blown through its ATH on lower oil and rates is very notable.
In short: It appears the equity market is beginning to heed the negative growth implications emanating decisively from cyclical sectors…counterintuitively, a hugely bullish dynamic for equities looking out to Election Day.
The FEDeral Government Put
An economic growth scare is bullish for two reasons: Number one, the Fed has made it crystal clear it will not tolerate growth going off a cliff, and since there is no way to know whether the economy is going off a cliff ahead of time, they will dovishly shift in real-time as data weakens. Two weeks ago Governor Waller specifically called out ISM data as a key indicator Chair Powell (Waller speaks on behalf of Powell) is watching to determine whether the economy is slowing down, so a second month in a row of ISM Manufacturing below 50 is highly likely to be viewed dovishly by Powell & Co, a dynamic confirmed by the fact almost a full cut is now priced in for September.
Two, an economic growth scare just emboldens Biden & Co to stimulate further via student loan and housing policies, among others, and unleash its $1.1 trillion TGA/RRP liquidity bazooka.
Tactical Risk Management
While the outlook to Election Day is decidedly bullish, given the change in character discussed above and sticky IG CDX, tactical care must be taken with NFP on Friday and CPI/SEP/Powell next Wednesday.
As dovish as weakening growth will make the Fed, they also will not want equities running away from them here given the reacceleration scare of the last six months. So, this market is likely capped until we get past June 12.
With the SPY 50dma sitting around $517, the 20dma around $526, and last Friday’s low at $518.36, it would not surprise me to see an undercut “failed breakdown” low below $518.36 before stocks take off for good later this month.
