Guts Of the Market Is The Best Economist

Guts Of the Market Is The Best Economist - Legendary Investor Stanley Druckenmiller

Most investors believe the market sell-off is anticipating a recession.  I believe the opposite is happening.  Growth is resilient.  As a result, the bond market is reversing the rate cuts implied for 2024. This is cascading through all assets, pushing rates and the Dollar higher, creating a negative feedback loop.

Bonds: The US 10-year is trying to break out of the important 4.4% technical level.  Will it break out? When will it break out?  Honestly, no one knows!

Currencies: The U.S. economic strength and higher rates are pushing the dollar higher.  The Dollar–Yen cross is at a multi-decade high. 

Equities: The market is in a late-cycle environment.  A late cycle does not mean imminent recession.  Late cycles can go on longer than most are willing to believe.  However, inventors emphasize large, defensive, growth. This explains the mega-cap outperformance to small and micro caps.

Equities: Heavy cyclicals also outperform in late cycles. Financials and consumer discretionary underperform.

The infrastructure plan and the prolonged energy bear market (low capex from 2014-20) are adding fuel to the fire. Regardless, Energy, Industrials, and Materials are outperforming Financials and Consumer discretionary.

Equities: Discretionary stocks are outperforming staples, which indicates the market is healthy.  However, this outperformance is limited to large and mid-caps.  Small-cap discretionary stocks are underperforming small-cap staples.  This emphasizes my late cycle point.

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