Currently, the markets are in an oversold state following the recent pullback. I have previously mentioned that as long as the RiskSIGNAL remains green, any pullbacks can be viewed as buying opportunities—and it remains green now. The semiconductor sector appears promising for investment. An ETF to consider is SOXX, and notable companies like AMD and NVIDIA Corp (NVDA) have also experienced pullbacks.
Notably, NVDA is set to announce its earnings after today's market close. This is shaping up to be one of the most eagerly awaited earnings calls in recent memory, especially given the market's growing enthusiasm for AI—and NVIDIA's leading role in that domain. Investors should brace for potential volatility in the after-hours trading session today.
The 20-year treasury, represented by the ETF TLT, has experienced a significant decline in price. Each uptick in interest rates has resulted in a downturn in the bond market. Notably, there's been a surge in sell volume over recent weeks, with investors quickly offloading intermediate to long-term bonds. This trend could hint at a potential bottoming out for stocks. Interestingly, the last time we observed such a sell-off in TLT was on 3/20/20, which coincided with a low point for stocks.
Although I anticipate further downside for Treasuries as the Fed raises rates, we're looking at a historic buying opportunity. Hedge funds have amassed a significant short position in Treasuries. Any unforeseen events, such as disappointing earnings from NVDA or a significant credit event, might accelerate the flight to safety trade. If this happens, Hedge Funds will be forced to cover their short positions. This could trigger a sharp and intense rally in TLT. If you can stomach the volatility, incrementally buying at these levels is something to consider.
Understanding the Current Pullback
Over the weekend, a friend asked me why the stock market was going down. He liked my explanation and wished his financial advisor could break things down in a similar way. So, here's what I told him in simpler terms:
The Positive: There hasn't been any significant negative event. The 2023 stock market surge can be attributed to:
Surprisingly positive economic data (the no landing/soft landing scenario).
A pronounced decrease in inflation (the disinflation scenario).
The Fed nearing the end of its rate hikes (the Fed almost done scenario).
The Neutral: None of these positive factors have changed since stocks began their decline recently. However, the market became overly optimistic, anticipating even better outcomes which didn’t materialize. Hence, some gains are being reversed.
Year in Retrospect:
Beginning of 2023: The market was pessimistic, with fears of a looming recession and surging inflation.
Reality Check: The economy did slow down, but not as drastically as anticipated. Although inflation remains high, it fell faster than predicted. This led to a justified stock rally.
Mid-2023 (Around July): Investors became too optimistic. They overlooked the decelerating economy and assumed inflation would plummet to normalcy. This excessive optimism drove the S&P 500 to around 4,600.
Present: Such heightened optimism was unwarranted as it went beyond the actual economic indicators. The current market correction is a reflection of the real economic situation:
Steady but decelerating economic growth.
Inflation rates that could stabilize above the Fed’s 2% goal.
The Fed's unlikely rate cut in the near future, which means higher borrowing costs like 7%-8% mortgages.
While this scenario isn’t detrimental, it doesn’t support the S&P 500 at the 4,600 mark, explaining its recent decline.
Perspective: The 2023 market landscape experienced extreme swings. The year started with dire concerns of a major recession, reminiscent of the 1970s' inflation and rate hikes. Fortunately, this didn’t materialize. However, it doesn’t ensure that we won't experience any economic slowdown, inflation won't stabilize, or the Fed won't remain hawkish. The actual situation lies somewhere in between the extremes but eventually the macro will catch up to this market and we will very likely see a vicious drawdown.
Outlook: Despite a stable fundamental outlook, anticipate increased market volatility. Yet, such fluctuations don’t signify a complete selloff yet. From an action standpoint, there's no fundamental reason to move to cash (yet). The recent market pullback is likely a consolidation phase post the 2023 rally, not a signal of a significant drawdown.
And remember - the one fact pertaining to all conditions is that they will change.
Feel free to reach out to me and use me as a sounding board.
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President