Let’s update the market comment from a couple weeks ago:

“A couple weeks ago in More Rate Hikes?, I observed

“The S&P is knocking on a widely watched glass ceiling around 4200. If it convincingly breaks through, traders will take it as an all-clear and run with it.”

This has come to pass. There remain a number of crosscurrents. The yield curve remains steeply inverted, although as we’ve also observed before, it becomes a more timely indicator when it begins to uninvert. The Fed is making noises about a potential pause or “skip” in rate hikes, a possible scenario being stepping back to 25 bp every other meeting, effectively halving the pace of increases. Prior step downs in this cycle have led to stock market rallies. Market breadth has been exceptionally skinny, as observed in Anorexia Nervosa, but is binging on fast food today, as the Dow Jones 30 and the Russell 2000 both leave the NASDAQ 100 in the dust and the rally reverberates around the world…

… Although there is no rational basis to believe this number has any magical significance, it has been widely cited in the financial media and has served as a ceiling for the S&P for several weeks. That this breakout might be taken by traders as a “buy” signal isn’t much of a stretch.”

This too has come to pass. The S&P closed at 4425.83 today. VT, our index of the entire world stock market, closed at 98.06. VT 98.10 is 10% below its all time high of 109 in November 2021. What next?

I expect this rally to echo the rally from late September to early December of last year. That rally took VT from 79.59 to 91.07, and the same proportion applied to the March low of 87.28 would take VT to around 99.87. That’s not much further. But this advance is moving more slowly in time, so it would be more likely to chop than race its way there anyway. In this area, some reversal is due. Sentiment has become bullish, leaving plenty of room for disappointment.

The breadth issue we highlighted in Anorexia Nervosa has for the time being been resolved. Although narrow breadth often results in the high flyers catching down to the majority, the divergence can also be resolved by the majority catching up to the high flyers. We have seen more of the latter than the former, and I see no imminent change on that score.

The bigger question is will last year’s low be taken out before new highs are reached. Our crystal ball doesn’t tell us, but the Fed’s increasingly lackadaisical approach to quelling inflation (its rhetoric notwithstanding) makes it possible won’t. I continue to believe Part II of the bear market, Part I of which occurred in 2022, is still out there. If new highs are reached first, our semantics are off … that would qualify as a new bear market. But the market doesn’t care about our semantics. We would simply have to revise them to reflect two bear markets instead of one with an extended intervening bear market rally. This would be confirmed only after the fact though, if the October 2022 lows are not breached. At current levels new highs are closer, but the long term view says lower lows are in the cards. Strategically though it doesn’t matter … either way there is another leg down ahead. The potential for serious downside remains mostly once the yield curve begins to uninvert and short term interest rates begin to decline.

Treasuries have underperformed our expectations, especially in price only terms. In total return terms, they’ve been less stingy … fat yields – particularly in comparison to the last decade and a half – have at least given investors something to compensate them for holding. This could continue to be the case until some kind of crisis unfolds. And by “crisis” I don’t mean something of the scale of the recent banking or debt ceiling kerfuffles … the media’s tendency towards hyperbole results in overuse of the term. Even then such a positive development for treasuries would be strictly cyclical … the long term outlook remains bleak.

In the bigger picture, the long term commodities outlook remains bullish. This is a result both of many years of underinvestment as investors’ attention has been diverted to all things tech, and governments having become habituated to unsustainable debt accumulation and central banks having been reluctant to push back. We characterized the 2020s as a commodities decade when it was just a few days old (and expanded on here), and have seen nothing since to change that outlook.