Early Friday action in futures shows the S&P 500
will hold at 11-week highs after rallying 12 of the last 14 sessions and taking its gains for November so far to 7.5%.
Investors like the sight of the 10-year Treasury yield
sliding about 60 basis points in just four weeks, as traders increase bets that the Federal Reserve will be cutting interest rates by the middle of next year.
That’s because recent data has pointed to easing inflation and slower economic growth. And, importantly, at the moment the stock market is happy that the latter is providing the former.
This is the bad-news-is-good-news narrative so beloved by equity bulls, where the prospects for lower borrowing costs seemingly trump all. But some commentators are warning that a psychological pivot is fast approaching.
“Much of this year has seen an inverse correlation where good or ‘hot’ data was negative for stocks, while bad data was positive. While lower yields are being greeted as a tailwind for now, that is often what happens ahead of recessions,” says Jonathan Krinsky, technical analyst at BTIG.
Krinsky examined all recessions — excluding the recent COVID downturn — over the last 50 years, those in 1977, 1980-82, 1990, 2001 and 2007, and found that for all there was a period where rates were falling and stocks were rallying.
But, ultimately, as the reality of the recession set in, stocks began to fall. “Are we at the ‘bad news is bad news’ inflection point?,” he asks.
Doug Kass, the president of Seabreeze Partners Management, thinks we should be. He notes that while the market has rediscovered its ebullience, as exemplified by the rush into call options, “the global bond markets and the commodities markets, especially oil, are signaling recession.”
The price of U.S crude
this week fell to its cheapest since July, while companies as diverse as Cisco Systems
have in the past few days warned of challenging times ahead.
“Meanwhile, U.S. high frequency economic data is eroding – including weakening jobs data, souring retail sales, the worsening NFIB data and a rising credit card delinquencies, among many other variables pointing in a southerly direction,” says Kass.
These factors may not be such a problem if, as note above, stocks hadn’t risen so quickly of late, traders weren’t so bullish and the market wasn’t so richly valued.
“A deep oversold in late October has turned into a deepening overbought in mid November as a universal view (which is really nothing more than a ‘feel’) is that ‘seasonal strength’ is upon us now,” says Kass.
As traders have chased the upside, the equity put/call option ratio has fallen to its lowest level since July. Meanwhile, the equity risk premium — the return investors can get when buying stocks relative to Treasurys — is “down to levels not seen in several decades.” says Kass.
“The last ‘soft landing’ in a period of rising interest rates was during the Clinton Administration…Buying into a recession at current and inflated valuations seems unwise,” Kass concludes.
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
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