Since the June FOMC meeting many investors have been increasingly focused on when the Fed will slow down and eventually pause the pace of rate hikes. This supposed “pivot” would be seen as positive for risk assets given the Fed would, in the mind of many investors, move to cut rates at signs of a significant slowdown in the US economy. Despite repeated push backs from the Fed Chair Powell, a combination of share buybacks and systematic buying has produced two strong bear market rallies since June with accompanying inflows into equities. Allied with narratives of a China reopening and a thus far mild northern autumn supressing wholesale energy prices, market participants have embraced a “hopeful” moment for risk assets. Many investors are playing for a year-end “Santa rally” in equities to rescue what has been an especially negative year for 60-40 style risk-parity portfolios.
Our work at IVI suggest that this “hope trade” is not sustainable. Whilst our fundamental conviction levels have remained negative for risk assets throughout 2022, our volatility, technical and positioning gauges have often not supported passive short equity positions. Now our market condition gauges are supportive of expressing the negative fundamental outlook which is worsening at pace. Whilst Europe and UK are already in recession, leading indicators point to a slowing US economy. Anecdotal and real time data indicate a rapid slowdown in consumer behaviour, shipping and freight rates are collapsing whilst companies reduce headcount and office space. Advertising spend, a classic leading indicator, is falling. We are seeing signs of significant disinflation building in many assets and products, including used cars which are seeing sharp increases in repossessions and loan deliquencies. Global housing is rolling over with a notable fall in transactions as sellers look to wait for a tick back up in prices to sell into. The crypto-crash further harms risk sentiment.
US Leading Indicators Retreat – Equities to catch up?
