A New Dawn

Issue 316

By Jeffrey Trusheim, Chief Financial Officer, Mortgage Solutions of Colorado, LLC DBA, Mortgage Solutions Financial.

Mortgage Solutions presents Issue 316 of Market Pulse. This commentary will provide Trusheim's perspective of the economic, political, and technical considerations that will have an impact on the global & domestic financial marketplace. The report will provide a recap of the previous week's activity as well as a look at the important market-moving factors in the week ahead.

Ask any Wall Street analyst about the recent parabolic rally, and you will most likely get the same response…It’s all about the Fed and interest rates. While November certainly lived-up to its historical reputation for being the best month of the year for the stock market (up 9%), it was the bond market that got the blue ribbon for giving us the best and fastest rally since the 2008 financial crisis. From its high yield around 5.00% on October 17th, the 10-year Treasury yield has plummeted 70 basis points to close at 4.20% last Friday. The 2-year Treasury yield did the same, falling from 5.25% to 4.55%.

Is this the dawn of a new bull market for stocks and bonds? Can this recent vertical climb continue higher? The markets have already priced in five rate cuts for next year, yet Fed Chairman Powell has repeatedly pushed back on market expectations for aggressive rates cuts ahead. Quoting Fed Chair Powell in a recent speech:

“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so.” However, he also noted that policy is “well into restrictive territory and the balance of risks between doing too much or too little on inflation are close to balance now.”

“Inflation is still running well above target, but it’s moving in the right direction. The data will tell us whether we’ve done enough or whether we need to do more.”

My take on Powell’s remarks is that the Federal Reserve is likely done hiking interest rates, but will keep rates high until inflation falls to their Fed’s 2% target. The FOMC meets again on December 12-13. Zero probability of another rate hike…or a rate cut.?

So, the trillion dollar question is: What will it take for the Fed to start cutting interest rates? Will it be because everything is rosy, with inflation at 2%, GDP growth at 5%, unemployment below 5%, consumer confidence high, etc.? Or, will it be because their aggressive tightening has created a “hard landing” that put our economy into a recession. Historically, the Fed does not lower interest rates when everything is rosy. The economy does not need extra stimulation during good times. The Fed won’t cut for the sake of cutting. There will have to be a compelling reason to start cutting.

IMHO, if the Fed does pivot on monetary policy and starts cutting aggressively next year, it will likely be because of a sharply slowing economy with rising unemployment. The Fed has almost always tightened too much (until something breaks) in previous hiking cycles. I suspect this time will be no different. Remember, interest rates take the stairway up, but take the elevator down. The market is sniffing out a recession next year and has already priced in five 25 basis-point cuts. As mentioned in? previous reports, I can see as much as 200 basis points of rate cuts by year-end 2025.?

THE STOCK MARKET

The S&P 500 took a breather last week, consolidating recent gains and trading in a fairly narrow range, with a low at 4537 versus a high at 4599, a weekly close at 4594, up 35 points and a new high close for 2023. Prices have gained for five consecutive weeks and are now trading against the July high resistance at 4607. A strong move above 4607 will signal higher highs ahead, with a fair probability of testing or exceeding the all-time high at 4818 in the months ahead. Although I won’t initially be buying a breakout above 4607 (if it occurs), I plan to be a buyer on the next pullback afterwards. After the recent 5-week, 496 point parabolic rally, a corrective pullback should occur soon. Initial support comes in near 4500, but a better Fibonacci (38.2%) target rests near 4400.?

When we step away from the trees and look at the forest, the big picture shows us that the stock markets have actually gone nowhere for well over two years. The S&P 500 is?currently trading at the same levels as it was during July 2021. Of course, the S&P had an 1100-point plunge, followed by an 1100-point rally during that two year period, which provided some nice tactical trading opportunities.

Is this another “false-start rally” in anticipation of Fed rate cuts coming soon? The market keeps trying to front-run these rate cuts, only to be disappointed. With five quarter-point rate cuts being priced in the market next year, there needs to be significant economic weakness before the Fed would engineer such aggressive rate cuts. The Fed doesn’t want to take its foot off the break too early. However, virtually all previous Fed cutting cycles have happened during or around recessions. Readers of this report know that I have been calling for a recession to begin in Q1 or Q2 2024.?

With the Fed’s preferred inflation gauge (Personal Consumption Expenditures or PCE) currently at 3.5%, well above their 2% target, rate cuts anytime soon are likely out of the question, notwithstanding an economic shock or Black Swan event.?

A recent survey of ten top Wall Street firms calls for the S&P to have below-average returns next year. The high target is 5100, and the low target is 4500, with the average at 4775. My forecast for 2024 will be available in the Market Pulse Report during the first week of January. As a teaser, I am expecting explosive moves in stocks, bonds, gold and oil.?

THE BOND MARKET

Bonds just had their best month since the 1980’s. Yields across the Treasury curve, from 2-years thru 30-years had their lowest closing yields since last September. The 10-year Treasury had a high yield on Monday at 4.51%, followed by a low and closing yield at 4.21% on Friday, down 26 basis points on the week, and down 70 basis points from the October high. Although I am a bond bull, and look for the 10-year Treasury yield to decline towards 3.50%-4.00% next year, I think that they have gotten a bit ahead of themselves lately. Bond rates sure have taken the elevator down!?

As most of you know, I tend to take a contrary view of the financial markets. When everyone us bearish, I look for a reason to be bullish, and vice versa. As noted in recent Market Pulse Reports, the CFTC was reporting record short positions in the Treasury futures market during October and early November. All of my technical indicators were pointing to a bottom, supporting the bearish sentiment positioning. Technically, any Treasury note or bond yielding 5% or better looked good to buy. The recent 70 basis point rally has now cleared-out those bearish positions and has gone overboard toward the bullish camp. JP Morgan’s most recent Treasury client survey, conducted every week since 1991, found that the most active investors are AS BULLISH AS THEY’VE EVER BEEN, and have increased their net long positions to 78%.?

So, it’s probably prudent to respect the current extremely overbought readings in all the financial markets, and expect some sort of a corrective pullback. Treasuries and precious metals (gold just made a new all-time high last week)? are still my main positions, but I am lightening-up in anticipation of a correction, and a delay in any Fed rate cuts until mid-2024.?

?

Have a great week!

For licensing information, go to https://mortgagesolutions.net/licensing-retail/ ??

?

Jeff Trusheim is the CFO of Mortgage Solutions Financial. Jeff is a 30+ year veteran in the Wall Street arena, with a background in economics, risk assessment and finance (banking and mortgage). He has previously worked in Fortune 500 companies in growing their portfolio and economic footprint.