Four assets are tracked weekly on this site. Surprising strength in stocks occurred last week (and for the month of October).
Talking heads will provide ample reasons why this happened (in their opinion). Some may even have some validity. Despite the positive results, severe caution is prudent.
Another week produced more puzzling results from markets — stocks and bonds exploded upward.
John Maynard Keynes, the famous economist, was also an investor. I do not know how successful he was in this endeavor. However, he made one of the truly brilliant observations regarding financial markets:
Markets can remain irrational longer than you can remain solvent.
Looking at recent results by week supports his observation. For example, last week was especially puzzling with the divergence in performance between stocks and bonds. This latest week stocks and bonds moved together, but markets showed unexpected strength:
|ASSETS||7/26/2022||Last Week||This Week||Week||From 7/26|
Stocks (proxies DJIA and QQQ) and bonds produced strong returns. If you believe the Fed is serious about stopping inflation, markets differed in their opinion, at least last week.
Weekly interpretations are limited in value. Definitive conclusions are impossible. What happens this week can reflect adjustments regarding past expectations and the effects of new information. It is impossible to discern the importance of either regarding current week outcomes.
A reaction like the one above suggests that market perceptions of the Fed’s ability or commitment to continue to raise interest rates is weakening. That perception could panic the large short positions placed in anticipation of lower stock and bond prices. When short-sellers view themselves oversold, violent buying often occurs to close out such positions.
This reaction could occur while expecting the Fed to raise another 0.75% at its next rate meeting if that were expected to be the last rate increase of such magnitude.
The dramatic rise in stocks and bonds suggests a major re-evaluation of expectations. Is this warranted? Is the Federal Reserve expected to back off its promises? What does this mean for the economy and future inflation? Everyone has answers to these questions. Sometimes talking heads agree and sometimes they don’t. Don’t be fooled into optimism. I don’t believe I have ever seen more dangerous markets (and economies) here and around the world. Be very cautious and careful!