June 6, 2024
Good morning,
Weeks ago, amid the March correction, we talked about the market message at that time being constructive in the short-term (wks./mos.). So far, so good. It has not been a barn-burner rally, just a gradual move up and to the right (more right than up) on most major global equity indexes. Market signals have not changed much since then, suggesting this period of modestly higher highs should continue.
What has changed is the early and growing evidence of an economic slowdown – a double-edged sword of sorts. On the one hand, moderating economic growth implies room for rate cuts (great for risk assets). Too much moderation though will stimulate recession concerns (not great for equities). Moderating, but positive, growth would be the best-case scenario for stocks. This would be Goldilocks’ outcome. Note that this is still a horizon event and beyond the normal discounting purview of the equity market. We’ll cover this more in the monthly letter next week.
The technical-signal weight of the evidence remains bullish for stocks (wks./mos.). Longer term economic indicators have turned less positive, hinting of larger thunderheads on the horizon. I am not an economist but believe that inflation data will come down quicker than overall economic growth data. It will give the market another reason to rally on rate cut expectations (this summer) before worrying about any recession after that.
Be well,
Mike
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