Hello TheoTrader,
Stocks were mostly lower last week, with only the Dow Jones Industrial Average finishing in positive territory. This blue-chip index’s outperformance in recent weeks is a testament to capital seeking areas of safety right now.
The biggest risk I see in markets right now isn’t coming from the Fed, monetary, or even fiscal policy. Rather, it’s the seemingly ever-shifting political winds, switching direction yet again this weekend as President Biden dropped his re-election bid.
I’ll put it this way: All of the capital flows we’re seeing in the near-term are indicative of this market being late-cycle.
Here’s what I mean…
The Hard Asset Theme
Look at the sectors that have captured the leadership positions over the past month, energy and real estate. These both fall under the hard asset category, which speaks to the turbulence in the fiat-money system over the past couple weeks.
There is a bit of a diverging story between these two, however. The energy sector bid is more inflationary, but I would see the real estate bid more as deflationary, since it’s off the back of a drop in interest rates.
The Fed is all but locked in to a rate cut at some point this year, and right now, odds favor a September cut. But while the market celebrates the prospect of more liquidity, we must not forget that this is an implicit signal that the economy is slowing. This is being reflected in the capital flows as well.
I’ll keep you updated on the risk front as this situation develops,