October 16, 2023
Good morning,
Markets do not discount the loss of life. It is called a bloodless process for a reason. My Morning Note is all about the behavior of markets and sometimes I miss the forest for the trees writing it. With apologies, my deepest sympathies go out to all my friends, their families, and to everyone touched by the unconscionable attack by Hamas on Israel. Godspeed to you all in the resumption of your incredibly difficult journey. You are in my thoughts and prayers.
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Bond prices rallied considerably last week; yields declined. Some of that was a flight to quality on the announcement of a new war. Some of it was too many traders being short bonds on the announcement of war. Stocks rallied early last week largely due to the decline in yields in the bond market and partly due to too many traders being short equity instruments as yields gapped lower. As the weekend approached, equity traders de-risked, not wanting to carry risk through an uncertain weekend. When Friday afternoon of a very tough week finally arrived, the S&P 500 Index was very close to unchanged for the week – up +0.45%.
With the specter of escalation weighing on investors’ psyches, the week ahead has the start of another earnings season, measures of the health of the consumer (retail sales and housing data), and a speech Thursday from Jerome Powell when investors get an updated view on Higher for Longer.
Many crosscurrents and elevated overall anxiety will probably lead to an uptick in volatility. Periods like this have so much noise that it is more difficult than usual to parse out the longer-term market message. We remain cautious because –
Ultimately, higher inflation leads to lower inflation via central bank policies, higher oil prices lead to lower oil prices by punishing consumers, and higher bond yields lead to lower bond yields by weighing on financial stability and credit growth. – Matt Gertken BCA Research
See you Thursday.
Be well,
Mike
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