S&P 500 continued with the buy the dip reaction through core PCE, and both yields and USD shook off BoJ pretty fast. The prevaling narrative still is that the Fed managed to engineer a soft landing and that recession has been avoided within the disinflationary context. This is part of the explanation for why declining LEIs and inverted YC are still being ignored as much as the end of corona era policies (student loans) and continued depletion of excess savings – together with declining tax receipts and tightening bank lending standards, omens of recession.
But how about its timing? Layoffs aren‘t picking up, fiscal policy is still very expansive, financial conditions not too tight, so the original Sep timing can get stretched anytime into December or even beyond.
Rate hikes aren‘t over, and we‘re in for return of inflation 2H 2023. That‘s though no issue for the stock market, which would still keep rising without a steep fall, driven by industrials, materials, energy, financials and many healthcare stocks – together with tech and discretionaries. Smallcaps and midcaps too as the theme is broadening of market breadth still. Communications aren‘t to be lagging as badly as e.g. staples either. That‘s for Q3 at least.
The Fed isn‘t to pivot – in current circumstances of real economy not falling apart, that would require a steep market drop, which is unlikely. Banking is gradually sorting itself out, deposit outflows aren‘t burning and commercial real estate (collateral deterioration) is still far away. The grind higher in stocks is clearly there, on more than a medium-term basis.
I‘m covering individual markets in more details within the chart section – but do yourself a favor and review latest extensive video where I‘m discussing these subjects in greater depth, making sense of the BoJ latest move in parallels to both chasing the rally in stocks and deposit outflows.
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Let‘s move right into the charts (all courtesy of www.stockcharts.com) – today‘s full scale article contains 4 of them.
S&P 500 and Nasdaq Outlook
4,592 with a limited undershoot acted as support Friday, and the same can be expected Monday. Stocks are slowly recovering lost ground on yen carry unwinding fears – fears that though aren‘t yet striking as imminent, which is what financials would welcome. 4,615 can be overcome again, and tech wouldn‘t be really weak in that (Monday) moment.
Market breadth is still healthy, and will return to broadening – smallcaps and midcaps would do well. Also within tech, the breadth would improve.
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