Following benign inflation data last week, Fed Fund futures highlight that traders fully expect a quarter point rate cut by Q1 of 2024.

So, the pivotal question is: would the markets truly rebound if the Fed initiates rate cuts in Q1 2024? Though widely held, history contradicts this belief. Typically, markets experience a brief uptick when the Fed pauses after raising rates. However, the chart’s red arrows distinctly indicate that major losses tend to occur when the Fed starts cutting rates.

Certainly, rate cuts are often prompted by economic troubles and impending recessions, prompting investors to sell stocks due to their vulnerability in such conditions. The chart consistently shows market declines during rate-cutting periods, with stock upticks only occurring after the Fed ceases cutting rates (indicated by green arrows).

Keep this in mind if the Fed embarks on rate cuts in early 2024 and the media advocates for stock purchases. The chart highlights a potential risky scenario, akin to a trap.

Stay tuned!

 Wall Street’s main indexes ended lower on Friday in a seesaw session, as investors digested a US jobs report that showed weaker-than-expected growth and awaited more economic data and corporate earnings in the weeks ahead.

The benchmark S&P 500 was solidly higher for most of the afternoon, but stocks sold off toward the end of the session.

In reviewing the performances of the world’s Exchange Traded Funds (ETFs) most would be surprised by the results. Note that while Argentina was the 3rd ranked ETF, its inflation rate is at 114%.

Here is a 6-month heatmap of the S&P 500 where size represents market capitalization and colour represents performance. Clearly, the Big 7 stocks have led this AI frenzy.

So far, 2023 has been the Great Rotation,  the inverse of 2022. In 2022, the areas of the equity market that fared the poorest, namely Nasdaq, Technology and Growth stocks, have turned out to be the strongest performers so far in 2023. Conversely, the sectors that performed exceptionally well in 2022, such as Energy, Value stocks and Equal-weighted indexes, have been the weakest performers.

Big winners other than the BIG 7 were Semiconductors, Homebuilders, Japanese Nikkei, EU luxury along with North American stocks.

Market sentiment

Every week the American Association of Individual Investors (AAII) does a survey asking their members ‘what are your expectations that stock prices will rise over the next six months?’

Historic average of bullish expectations is 37.5%. This week it is 46.4%, the highest it has ever been.

CNN’s Fear & Greed is another indicator that gives a sense of where investor sentiment is. They use 7 indicators from Moving averages, put/call ratios, Vix Volatility etc, so a fairly broad range of indicators.

Sentiment is at the Extreme Greed level, as the Fear Of Missing Out or FOMO is in full swing.

Warren Buffet: ‘Be fearful when others are greedy & greedy when others are fearful’

Central Bank Watch:

Based on the CME FedWatch Tool, there is 93% chance the Fed will raise rates .25% at their July meeting, and just a 7% chance for another PAUSE.

Consumer confidence, strong wage gains and a tight labour market continue to keep inflation ‘stickier’ than the central bankers would like.

On Thursday we saw US ADP data (based on actual payrolls) added 497,000 jobs in June, that is massive. On Friday US government data (based on phone surveys) showed 209,000 jobs;  the 30h consecutive month of job growth in the US. Certainly, fuel for more rate hikes to come

In Canada on Friday, we got the jobs data which showed 60,000 new job, which was triple the expectations. BOC governor Macklem seems pretty adamant on crushing inflation, so we expect both the Fed & BOC to raise rates this month.

Debt Ceiling?

Since the Debt Ceiling debate was settled, the US government got back to doing what they do best….spend taxpayers’ money.

From June 2/23 when debt ceiling was raised, till the end of July 7/23, so 21 business days, the US has added $935 billion to their debt. That is over $44.5 billion per day. These numbers are straight from the US Treasury site.

The Bad & Good of Recessions:

Stock markets do NOT do well in recessions as investors become risk-averse and pessimistic about the economy. Sell-offs can be significant and panic can become a real strong force. As investors, we need to have a plan to protect our wealth should these recession warnings come true.

On the positive side, recessions can present excellent buying opportunities once the bottom is in. If we get another recession, after the SELL OFF, it will present a fabulous time to buy stocks.

Martin did a 30-minute interview with Jim Goddard on Howestreet’s This Week in Money. In the interview Martin offered listeners some special offers below. Also, Martin said Trend News will donate $100 to Special Olympics for every new subscription this week.

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Martin was the guest on Financial Advisor Bill Westmacott’s webinar with James Longstreet. Topics discussed were:

• Current market conditions
• How to identify trends in various sectors
• Debt concerns
• How was this serious inflation created?
• Will there be a recession and if so, how will it affect the average person and the markets?
• What should the average investor consider doing regarding the current market?

Stay tuned!

Stocks closed slightly higher on Friday afternoon as investors digested a final slate of corporate earnings and fresh economic data to close out the week. The S&P 500 rose 0.09%, while the Dow Jones Industrial Average  rose 23.99 points, or 0.07%. The technology-heavy Nasdaq Composite rose 0.11%. All three major averages closed the week lower.

The S&P Global’s flash reading on the US Manufacturing Price Index came in hotter than economists surveyed by Bloomberg had expected on Friday. Services PMI hit a 12-month high at 53.7, while Manufacturing PMI hit a six-month high of 50.4. Economists had estimated Services PMI at 51.5 and Manufacturing PMI at 49, per Bloomberg consensus data.

Two indicators with incredible records for accurately predicting a recession, are both forecasting a recession. The first is the inverted yield curve.

Since 1955, so in 68 years, there has been only one time where the yield curve inverted without there being a recession. Today the yield curve is the most inverted it has been in over 40 years.

Also, there have been ZERO times when inflation ran above 5%, with an inverted yield curve that did NOT result in a recession. Until this week, inflation has been over 5% for months.

The second indicator is the Conference Board’s Leading Economic Index (LEI). This week, the LEI fell to its lowest level since November of 2020.

“The US LEI fell to its lowest level since November of 2020, consistent with worsening economic conditions ahead,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “The weaknesses among the index’s components were widespread in March and have been so over the past six months, which pushed the growth rate of the LEI deeper into negative territory. Only stock prices and manufacturers’ new orders for consumer goods and materials contributed positively over the last six months. The Conference Board forecasts that economic weakness will intensify and spread more widely throughout the US economy over the coming months, leading to a recession starting in mid-2023.”

Over the last 40+ years, every time this indicator drops < 0 and stays there for 2+ months a recession followed 100% of the time. This index has been < 0 for over 6 months now.

We have a chart that we keep showing our subscriber & it highlights when the Fed is in a rate hike cycle like they are now, the bottom in the market aligns with when the Fed STOPS CUTTING rates, not STOPS RAISING them…this is a very key point.

Typically, when the Fed pauses, there is a brief uptick in the markets, But when the Fed STARTS CUTTING, that is when the big LOSSES start to happen. So, markets typically fall as rates are cut & not until the FED STOPS CUTTING do stocks start to rise again. Be careful!

With gold, there was a heist of $20 million worth  from the Toronto airport.

Gold & silver have had a terrific run here, with gold reaching 2063 on April 13. Silver has done even better, which is typical in a bullish trend for precious metals. In BULL markets silver outperforms gold & in BEAR markets silver underperforms gold.

One thing that we have been watching is that the mining stocks have been lagging the metals.  Eventually, this gap will close with either the miners rising to catch up to the metal,  or the metal falling to drop down to the miners level.

Stay tuned!

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