Volatility returned to the stock market this week after a period of calm. Stocks have been trading within a limited range without clear catalysts for further buying pressure. Technology stocks, which have been driving the market’s performance this year, are currently trading at high valuations. There are significant unresolved risks and uncertainties in the market. The Federal Reserve is expected to raise interest rates to over 5% next week due to slow credit tightening and higher-than-preferred inflation. The latest Core PCE inflation reading remained relatively unchanged at 4.6%, far from the Fed’s target of 2%. The fight over the debt ceiling is heating up, with Republicans passing a bill in the House to raise it but with spending cuts that Democrats are expected to oppose. This situation could lead to significant volatility during and after the negotiation process, similar to the 2011 debt ceiling crisis. The breadth of the stock market rally, representing the number of companies participating, has been steadily declining. The market appears both resilient and fragile, but the fragility is believed to be underestimated given the range-bound trading, diminishing breadth, and the presence of market-moving uncertainties. A fragile market increases the likelihood of sudden, sharp downturns, which can harm long-term portfolio returns.<\/p>\n
Volatility returned this week after about a month off.
\n\u2022 Stocks remain range-bound in what we’re seeing as a no-man’s land.
\n\u2022 There are no readily-discernible catalysts to further buying pressure.
\n\u2022 Tech has led the market’s rise so far this year and is very expensive: currently trading at 25x forward
\nearnings.
\n\u2022 Risks and uncertainties are big and unresolved.
\n\u2022 The Fed will hike rates to over 5% next week.
\n\u2022 In this they really have no choice: credit has been slow to dry up (even with the regional banking
\ncrisis) and inflation is still much higher than they would prefer to see.
\n\u2022 Last month’s Core PCE inflation reading (the measure the Fed pays most attention to) came in
\nrelatively unchanged at 4.6%. Still a ways from the 2% the Fed would much rather see.
\n\u2022 The debt ceiling fight is just warming up.
\n\u2022 This week Republicans in the House passed a bill to raise the ceiling but with a host of spending
\ncuts that Democrats are certain to balk at. The ball is now in the Democrats’ court.
\n\u2022 If this fight is anything like 2011’s, we can expect significant volatility in both the run up to the
\nagreement and even after the ceiling is raised as markets digest the negotiated product.
\n\u2022 Meantime stock market breadth\u2014the number of companies participating in this latest stalled rally\u2014has been
\ndeclining steadily.
\n\u2022 The market is in a paradox: it is simultaneously resilient and fragile.
\n\u2022 We think that, given its range-bound trading and fading breadth (not to mention the market-moving
\nuncertainties), the fragility is currently being understated and underappreciated.
\n\u2022 Nothing is more harmful to long-term portfolio returns than sudden, sharp downturns. With a fragile market
\nthe likelihood of such sell-offs is much higher.<\/p>\n
Stocks range-bound. Resilient, yes. Fragile, yes.
\n\u21d2 Breadth is fading. The number of stocks participating in this year’s rally is dwindling.
\n\u21d2 Environment not conducive to stock outperformance: Fed raising short-term rates to over 5% next
\nWednesday and keeping them there. Inflation elevated, stubborn.
\n\u21d2 Stagflationary data from Q1 GDP report: growth comes in at 1.1% (lower than expected), while GDP
\nprices came in at 4% (higher than expected and higher than the previous quarter).
\n\u21d2 Debt ceiling negotiations tentative following Republican House passage of bill to raise the ceiling
\nbut with spending cuts that Democrats will refuse to go along with. Unstoppable force, immovable
\nobject.<\/p>\n
\u2022 The S&P 500’s year-to-date return is being propped up by a handful of mega-cap tech stocks. The rest…<\/p>\n
\u2022 While the Nasdaq’s YTD return continues to fly high\u2014thanks also to the largest tech stocks\u2014the number of
\nadvancers as compared to decliners continues to fall. These lines will have to converge at some point.<\/p>\n
\u2022 While mega-caps have lifted the S&P, the equal weight measure of the total market is showing broad weakness.<\/p>\n","protected":false},"excerpt":{"rendered":"
Volatility returned to the stock market this week after a period of calm. Stocks have been trading within a limited range without clear catalysts for further buying pressure. Technology stocks, which have been driving the market’s performance this year, are currently trading at high valuations. There are significant unresolved risks and uncertainties in the market. The Federal Reserve is expected to raise interest rates to over 5% next week due to slow credit tightening and higher-than-preferred inflation. The latest Core PCE inflation reading remained relatively unchanged at 4.6%, far from the Fed’s target of 2%. The fight over the debt ceiling is heating up, with Republicans passing a bill in the House to raise it but with spending cuts that Democrats are expected to oppose. This situation could lead to significant volatility during and after the negotiation process, similar to the 2011 debt Continue reading