HOW I SEE IT – by Bruce

 

Correction low? /Rolling bull markets/Leveraging end

Equity indices drop this week - are we at the month low point? Dow high 39,900 end of March to 37,700 this week - 2200 points or 5% correction- could be the low.

Positives:  

AAII Investor Sentiment Survey- 32.1% bullish/ 33.9% neutral/ 33.93% bearish - Lower bullish reading for 4 weeks- follows the correction- good for bargain hunters.

RBC GAM /CM /WM, “Macro - Under performance of Canadian economy relative to the US in increases the odds that a gap in policy rate and a weaker Canadian dollar are more likely to be tolerated by BoC. RBC expects the BoC to cut rates from before the Fed, and at a more aggressive pace afterwards. US Equity Strategy- sentiment and growth take a hit. RBC CM expects the pull back to bottom out in a 5-10% range versus the recent high. The improvement in US GDP forecast reduce the likelihood of a pullback greater than 10%. While the market stress has moved up as shown in the VIX and equity put call ratio they still remain quite low when looking back over long periods of history. Outflows from US equity funds, & global equity funds point to derisking.”

Mark Schmehl Fidelity listened to his latest market comments this week, “Most important thing is focusing on earning growth of the companies. World of economy is not great, but there are pockets of incredible strength. It has been a nice orderly correction, but nothing fundamentally has changed. The trends in place are stronger than they were 12 months ago. I remain bullish. I think there will be a good year for stock picking. The market was up 30% in the first quarter. I’ll probably get some of that back. These trends will continue to work. “

Dr. Ed Yardeni, “It’s widely believed that high interest rates act as break on economic activity. But do they? Today we examine our fringe view that perhaps the economy is so strong because of high interest rates, not despite them. After all, Fed tightening hasn’t produced the expected lagged economic effects; Consumer spending hasn’t flagged as it does before recessions. On the contrary, consumers are spending briskly despite higher debt servicing costs. That’s because overall they benefit more from higher interest rates than not, via incrementally non-labor income. (Dr. Ed said we have had rolling recessions- are we having rolling bull markets now like in AI, gold, oil, commodities and even real-estate.)

Tom Lee, “More favorable to equities given oversold conditions. Five reasons why stocks are down. 1. The relentless 28% rise since October 2023 was due for a pause. 2. Earnings of a $ASML and $TSMC triggered red flags on AI. 3. The 3 most recent inflation reports triggered fears of second wave. 4. Higher inflation compels fed to delay cuts but markets overshooting. 5. War risks generally elevating with conflict in Middle East.  Fundstrat believes inflation expectations will reverse. Q1 earnings remain strong so far. Medium core CPT at 1.76% is below long-term average of 2.4%. the percent of S&P 500 stocks above the 20-day moving average currently stands at 8%. Extremely oversold reading. S&P 500 target remains 5,200 for year end.  Leveraging might be nearing an end.”

Negative: 

Yield curve has been converted for over 500 days. We’ve only seen this three times in history – 2008, 1929, 1974. All three saw greater than 50% stock market drawdowns. History tells us it’s about to get ugly. More inversion days equals deeper drawdown. We’re already at 511 days. Brian Westbury, “The economy continued to grow in the first quarter at what we estimate is at 2.6% annual rate. That’s a slowdown from one from the 3.1% rate in 2023. we think a chunk of recent growth is artificial and temporary, the byproduct of too much government. Solid for now, but we expect slower growth later this year as the temporary effects of government deficit spending were off.”

Investment strategy: “In order to be a great writer or investor a person must have a built-in shockproof crap detector.” Ernest Hemingway.

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Have a great weekend! Bruce