Oftentimes equity markets feel like a coin flip but right now, it’s a heads-I-win, tails-you-lose kind of game.
The thing is, I agree with it because these are the two most-likely paths from here:
1) Growth surprises to the upside
At the end of the day, growth is good. Consumer spending is by far the driving force of the US economy and most US homeowners are still flush with money from fixed 30-year mortgages and secure jobs that are paying better than ever before. Companies went into 2023 cautious on recession fears but they may begin to invest again while continuing to see productivity improvements from AI.
2) Growth falters
Interest rates are undefeated as a choke on economic growth. It’s not a good time to borrow money and banks are struggling under the weight of the busting office and commercial real estate market. Car sales have slowed and should continue to stay subdued due to high financing rates. Global demand is also sinking, hurting US exports. However there’s a cure for all of this: If growth disappoints, the Fed can cut rates.
It’s a classic case of the Fed put.
The only scenario where it really goes wrong is in a re-acceleration of inflation as growth slows down. That’s certainly a tail risk but it’s a 5% probability at best, especially with the US likely to import disinflation from abroad.
A higher probability — I believe — is that growth surprises to the upside but inflation also surprises to the downside. That would be an absolute Goldilocks scenario and you can see it playing out today with oil down $1.30 (and $7 since last Friday).
Looking at the equity picture, tech is looking like it could go super-nova. Fund mangers and individuals are clearly chasing mega-cap tech here because … what other trade is there? If you don’t own one of the Mag 7 (6?), you have little chance of matching the index. Some of the valuations are hard to justify but when has that ever stopped an equity market rally?
I’m obviously not breaking any ground here as the market (and me) figured this out awhile ago but it’s such a compelling backdrop that it’s the kind of thing that could spark a massive overshoot.