The U.S. Treasury yield curve remains inverted, meaning bond investors still expect an economic recession in the country. We are only now starting to see the effects of the first interest rate increases because it takes about eighteen months for the real economy to acknowledge the effects of rate hikes. Therefore, we have about twelve months to determine whether bond investors are right in their recessionary forecast.
In the meantime, contrary to their usual long-term profile, stock investors are currently acting as short-term players. On Thursday, the 28th, Q4 GDP was revised from 3.2% to 3.4%. In February, income rose 0.3%, slightly below expectations, while spending rose 0.8%, comfortably surpassing expectations. The FED’s preferred inflation measure, the PCE deflator, rose 0.3% headline and core, with 2.5% and 2.8% yearly increases. The FED’s target is 2%. The Atlanta FED’s GDP-Now estimate stands at 2.8% for Q1. This is a slowdown from Q4 2023, but still a robust figure. Although inflation is not at the FED’s target, in the view of stock investors, the cooling inflation data, or not accelerating inflation, suggests the possibility of the first interest rate cut in June. I have trouble understanding how investors expect an interest rate cut in June while inflation is above the FED’s target and economic growth is far from recessionary.
The best six months of the year (November through April) for the S&P 500 Index will end at the end of April. However, the stock market has been moving consistently up since November without a significant pullback or correction in expectation of interest rate cuts soon, while momentum continues to slow, showing a negative divergence between price and momentum. This may be resolved by a pullback or a sideway consolidation move in which the stock market tends to decompress before resuming its uptrend. I would not be surprised if such a move occurs during Q2 and Q3, mainly if the 10-year US Treasury Yield regains its uptrend.
We expect the economy to remain within Phase 2 and Phase 3 in the economic cycle for the rest of 2024. The former is when GDP and inflation accelerate together, and the FED bias remains hawkish, while the latter is when GDP decelerates with accelerating inflation and a constrained FED. This estimate is important because stock markets do not collapse during these two phases of the economic cycle. On the contrary, in Phase 2, growth prevails over value investments, and in Phase 3, value prevails over growth investments. However, accelerating inflation alongside decelerating economic growth requires a more proactive investment and risk management approach. Not only to stock investments but to bond investments as well. In an inflationary economic environment, Treasury yields will increase, and bond prices (especially long maturities) will decrease. Additionally, a cyclical bear market may unfold at a certain point depending on how much interest rates rise. In such an environment, a passive portfolio management strategy, buy and hold, can be frustrating and painful.
Conclusion: We remain cautious and expect a pullback or correction within Q2 and possibly even Q3, but overall, we are bullish for 2024 as long as the FED does not have to hike rates.
Please remember that our forecast may change as economic data becomes available.
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Check the Main Trends of stock indices, volatility, yield, currencies, and more here.
(*) The Greenwich Creek Capital “Index Trend Table” is not meant to be used in isolation, it is part of a more complex set of variables and it is not designed to provide trade entry and exit points.
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