Pace of rate cuts, plus market divergences and Morgan Housel
The Sandbox Daily (2.9.2024)
Welcome, Sandbox friends.
Today’s Daily discusses:
pace of rate cuts
list of divergences is growing
Morgan Housel on personal experiences
It’s Friday – hope everyone has a great weekend!
For now, let’s dig in.
Markets in review
EQUITIES: Russell 2000 +1.53% | Nasdaq 100 +1.01% | S&P 500 +0.57% | Dow -0.14%
FIXED INCOME: Barclays Agg Bond -0.03% | High Yield +0.21% | 2yr UST 4.482% | 10yr UST 4.173%
COMMODITIES: Brent Crude +0.36% to $81.92/barrel. Gold -0.42% to $2,039.2/oz.
BITCOIN: +4.41% to $47,413
US DOLLAR INDEX: -0.09% to 104.069
CBOE EQUITY PUT/CALL RATIO: 0.62
VIX: +1.09% to 12.93
Quote of the day
“What I’ve found in my research is that realism and self-honesty are the antidote to ego, hubris, and delusion.”
- Ryan Holiday, The Daily Stoic
Pace of rate cuts
Among last week’s FOMC statement, Jerome Powell’s 60 Minutes interview on Sunday, and several Fed officials' speeches this week, the Federal Reserve is sending a clear message to the markets: they are not cutting the Fed Funds Rate at the upcoming March FOMC meeting.
The market is expecting lower rates later this year, but the context around those cuts matters immensely.
Thus far, the Fed’s message to markets is it plans to cut interest rates slowly. If inflation continues to moderate towards its 2% target and economic growth remains solid, the Fed will remain in the driver’s seat and engineer its desired policy outcome.
This is music to the bulls’ ears because a slower pace of cuts has been bullish historically. The S&P 500 has risen an average of 24.4% during the 1st year of slow easing cycles (<5 cuts over a 12-month period), versus 5.2% during fast cycles (5 or more cuts).
Source: Ned Davis Research
List of divergences is growing
Legendary market analyst Bob Farrell has 10 rules for investing, which are available to anyone over at StockCharts.
Number 7 is particularly relevant to today’s market: “Markets are strongest when they are broad and weakest when they are narrow to a handful of blue-chip names.”
There has been a lot of talk about the impact of the Magnificent 7 stocks (Apple, Microsoft, Google, Amazon, Meta Platforms, Nvidia, and Tesla) on the returns of the major averages. Yet, it is clearly obvious more than 7 stocks have gone up to anyone who takes the time to count.
Yet, while the indexes continue making one new all-time high after another, it is doing so as market internals have clearly shifted, perhaps even deteriorated, under the hood.
Since December 27th:
the NYSE Advance-Decline Line peaked and rolled over
the percentage of NYSE stocks trading at 1-mo, 3-mo, and 52-week highs grows smaller and smaller (see chart below)
classic defensive plays like Consumer Staples have gained strength
U.S. Treasury yields started turning higher
the U.S. dollar index bottomed and hooked higher
copper topped out
None of these developments – on a standalone basis – are particularly alarming, but as any experienced investor will tell you, the weight-of-the-evidence approach suggests some near-term caution is warranted here.
To be clear, the longer-term trends remain in place (higher), but several short-term signals are flashing yellow.
After the monster breadth thrusts witnessed and huge performance gains achieved from late October, perhaps more time and further consolidation is needed before the next broader push higher.
Source: All Star Charts
Morgan Housel on personal experiences
I’ve been re-reading Morgan Housel’s The Psychology of Money over the last week, and I keep revisiting this one idea over and over in my head:
"Your personal experiences with money make up maybe 0.00000001% of what's happened in the world, but maybe 80% of how you think the world works."
There’s so much truth in this statement.
As we go through life, we learn from our experiences – and that's generally a good thing. We learn through trial and error, we grow from our mistakes, and we develop mental heuristics to quickly solve problems. We satisfice.
But sometimes a financial experience can leave such an outsized impression that it distorts our future behaviors. Sometimes those experiences are positive and sometimes they're negative. The key, though, is to recognize that, as Housel points out, they are very limited data points in the broader scope of life.
The lesson: As much as it seems like the right thing to do to learn from experience, when it comes to financial experiences, you want to tread lightly and be aware of blind spots.
Source: Morgan Housel
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.