Well, that’s a wrap for Q1 2024! Markets did not disappoint in the slightest, as stocks across the board hit new all-time highs (save for the Russell 2000).But as we are in the precipice of a new quarter, there are some notable shifts taking place, not only within the stock market, but also within the bond market.
Remember, bonds are a much bigger market than stocks. And many consider it to be where the majority of “smart money” plays.So, what does this mean for you and your portfolio? A lot, actually.
You see, we’re caught between two key cycle scenarios in the bond market.
One of them is long-term, the other, short-term.Let’s start with the long-term cycle and consider the possibility that the October 2023 bottom in bonds was it. If it was, then I’m looking at bonds rallying into summertime (at the very least).
But if October 2023 wasn’t the bottom, then we’re likely set for another round of rising rates, tumbling bond prices, and even inflation into year-end.Just last week, we saw the Fed’s preferred inflation metric, the Core PCE, come it at estimates for the month of February. I’m not exaggerating when I say there is an epic battle taking place in bond markets.
Now let’s consider the short-term cycle in bonds. Basically, I’m willing to entertain the idea of a bond market rally going into summer so long as we hold above the February lows. If that breaks, look out below - inflation will be coming back with a vengeance.
Just as a quick reminder, interest rates tend to follow inflation expectations. Bond prices move inverse to interest rates. Thus, if the “smart money” in bonds start sniffing out more inflation, it would induce a selloff in the asset class.
Now for how this impacts stocks...
My number one objective is outperformance in my portfolio, and if you’re reading this, I assume it’s yours too. Here’s the thing - both rising and falling rates help certain sectors more than others. When rates drop, growth sectors like tech, communications, and consumer discretionary tend to outperform.
But when rates rise, we must consider the “inflation trade” as the preferable option. That is, sectors like energy, industrials, and basic materials will tend to do better.
If you’ve been paying attention, you will have noticed that elements of the inflation trade have done well in the past couple weeks. After all, crude oil has been rallying since December.
But just last week, the top-performing sector was utilities. This is a risk-off signal for stocks, and typically, utilities outperform when rates are set to drop. So, stay tuned for this key intermarket development. You best believe I’ll be watching it carefully for my own portfolio!