Are we looking at fundamentals now more than some of the macro factors we have
been? Yeah.
You know, look, I think Mike got it right this week, certainly.
Markets were driven by those earnings results and really the earnings results
from the mega cap technology names. And as you noted, they surprise and a
surprise to the upside. And that wasn't only earnings beats.
A lot of them are now showing that their business models are resilient, even
through economic swings. And also, they are showing off a little
bit of their cash piles. We saw a couple of very big share
buyback programs announced this week as well.
And we saw at the end of the week, really equity markets were bullish.
They were positive for the week. And that came even despite softer than
expected GDP data inflation data that might be a little bit stickier than some
might have hoped for. So generally for the last couple of
weeks, it certainly has been the earnings story, driving markets and
really driving those growth sectors in particular.
But as we look towards the weeks ahead, especially next week, when the Fed
becomes more and focus again and as the economy and inflation continues to
remain to the forefront, I think we'll see a swing from earnings and equity
fundamentals to macro picture becoming more and focus in the weeks ahead as
well. So it's only right for this week.
Greg, what's driving the fixed income markets?
It is inflation, the economy, and what is the Fed going to do about it?
So we're on knife's edge in fixed income, whether it's a recession or a
soft landing. There's talk of stagflation still
course. And the data are so all over the place
and disperse that you can basically draw a narrative or a conclusion from the
data in any way you want. Well, listen, I'm curious about that,
because the 10 year yield, at least to my eye, has not been going much of
anywhere anytime soon. Is that because people are happy with
where it is, is because they can't just decide anyway they look, it could go
either way. They just can't tell.
Yeah. So that mass, you know, what's
underneath. And so what we're seeing, though,
intraday basis in the week entered, you know, the the the moves are pretty
extreme. Fixed income volatility remains really,
really high. So, yes, the 10 year is virtually
unchanged this month of April. But the swings are pretty substantial.
And what about in the equity markets? What are we seeing in the VIX is pretty
subdued, is it not? Yeah.
You know, it really is one of the key stories that has emerged over the last
few weeks, which is that that volatility index, some call it the Wall Street fear
gauge has been very subdued, in fact, down about 25 percent year to date,
which shows a bit of complacency from the markets and perhaps a little bit of
investors hiding out. Keep in mind, cash and cash equivalents
are offering attractive yield. So if investors do want to wait for
better opportunities, they certainly have an alternative.
Now, that is a pretty attractive alternative.
But generally speaking, you know, some of the catalysts that were supposed to
emerge early on this year, including earnings, including the Fed potentially
next week and including this economic downturn, really haven't yet surprised
in any material way. And so I do think markets have yet to
see a meaningful catalyst. Perhaps the Fed pause that may be on the
horizon will be that one will want to. What about the possibly recession?
Because we still have a lot of economists saying that it's more likely
than not, perhaps as high as 70 percent likely that I don't think I can see that
very much in the equity markets. So the equity markets know something the
economists don't when it comes down saying maybe the equity markets don't.
Yeah. You know, look, I think this recession
that is on the horizon is probably one of the worst kept secrets that's out
there among economists and investors. Everybody has been talking about it.
The deceleration we saw this this past week in first quarter GDP has shown a
slowdown from three point two percent in Q3, two point six percent in Q4 of last
year. This this quarter, one point one
percent. So we're seeing this downward
trajectory. The consumer is still holding up.
But if you look at forecasts for Q3 and Q4 of this year, we are, in fact seeing
negative and slightly negative annualized growth rates.
So in our view, this idea that a mild recession is on the horizon is very
likely still probably still a base case scenario.
And markets won't be able to completely ignore that.
But keep in mind, we did put in a lot of work to the downside over the last 15
months or so. The S&P went down almost 25 percent peak
to trough. We don't see a repeat of that happening
even if we have a mild recession ahead. So any period of volatility,
consolidation, pullback, we think could provide some opportunities for investors
as they look past this bear market and perhaps towards a recovery period ahead.
Greg, what about the bond markets? Because because we got a lot of economic
data this week and it showed sort of slowing growth, perhaps, but inflation
is not going away, maybe headed in the right direction is not going away.
Are the bond markets prepared for the possibility of the Fed hiking even past
May? No.
In fact, the market's pricing in the opposite, right?
They're pricing in rate cuts in the back end of this year.
And to me, that is, you know, the risk markets are ignoring that.
If the Fed cuts, that means we are into a recession or a much weaker period.
But the binding constraint. Continues to be inflation, and I think
we're in a very different environment. We've been so accustomed to the Fed
coming to the rescue and it's much easier to do that when they're operating
below that 2 percent level, when they're above and they're pretty meaningfully
above their degrees of freedom really, really get much tighter.
So I think the markets are mis calibrating what the Fed can do and the
opposite is also true. DAVID WEBER If the numbers continue to
assert themselves on the inflation side, there's more work to do and the markets
have been consistently wrong on the level of inflation and what the Fed's
response function.