I was up on the roof deck (my Covid refuge) the other night; it was a bright, clear night, some stars were visible which is not always the case in NYC. It was the moon that grabbed my attention—right overhead, a perfect half-moon, split right down the middle, states Jay Pelosky of TPW Advisory.

I think the markets are like the half moon, revealing some things, hiding others, halfway through its rotation, in the great in between—between the capitulation lows of late January and the early January highs…most stocks/ETFs are not overbought or oversold—though the ones that are provide signposts, much like the stars. 

On the economic data front, the search for the other half, for the level where one can say peak Fed hawkishness is here, remains a work in progress. I gave it a stab roughly three weeks ago and have been laughably wrong—the only saving grace being our model portfolios do not reflect the degree by which I have been off. I even tweeted out Wednesday that one way to know the Fed is truly priced in is to see stocks rally hard in front of the CPI print…silly me.

The big US CPI print, though only 20 bps above consensus, was something equities seemed to handle just fine; Bullard’s post print comments were a whole other deal. Known as an outspoken hawk, he repped, saying he wanted to see 100bp in hikes by July, tanking stocks and setting the stage for a tweetstorm calling for 50 bp hikes in March and even the almost laughable idea of an intermeeting hike…I mean crazy is as crazy does…but what counts as crazy in today’s day and age?

Goldman now says seven hikes this year—one every meeting so we must be close to that elusive peak Fed hawkishness. I think we are, and look at the very oversold nature of the Barclays AGG ETF (AGG)—at its most oversold on 14-day RSI basis since Spring 2021 in fact (the start of the Value rally). I also note the ten-year UST rate breaking 2% and getting very close to a key trend line around 2.05%, the trend line from the very top in rates back 40+ years ago—I don’t see this breaking easily. And let’s not forget the PBOC is easing—China’s January aggregate lending data just hit a new record.

At the same time, I note that Commodity-Indexed Trust (GSG), the broad commodity ETF, is quite overbought; well above 70 on the 14-day RSI while charts fly around showing the breadth of the commodity advance (I think beef tallow is rocking—jk), and noting how these broad runs tend to end quickly.

Last week, I made my tactical case for LTE inflation data and BTE growth data over the coming months. I stand by this POV and expect data such as used car prices, food, and energy prices to start to slow on a year-to-year basis. This could help improve rock bottom consumer sentiment (now at 2011 levels according to the just released University of Michigan survey) and fuel a growth pick up.

The strong run in commodities reflect solid global growth as Omicron fades and restrictions are lifted around the world. ESS US Global Jets ETF (JETS) sniffs it out—up roughly 10% in a week. Gold, pounded on the Bullard comments, bounced back nicely this morning suggesting it knows that the Fed is unlikely to get GS’s seven rate hikes in this year. The dollar’s failure to lift at all says the same and reflects the rate rises around the DM, from Germany to Japan and beyond. I remain in the three hikes camp myself.

Strategically my (2023-2025) view remains better growth days lie ahead—better than the market pricing in a return to pre-Covid’s tepid 2.3% real US growth. Some are coming round to this view with an interesting Bloomberg piece today talking about “boomflation”. It suggests the Fed should recognize getting down to 2% inflation in short order will require breaking something and creating an unnecessary stock market rout and recession (aka “the bear case”). It suggests letting inflation run a little hot, say 3% with growth at roughly 3% and presto, “boomflation”.

As each month passes we move closer to 2023 and the period that will define what an endemic Covid world will look like. Back to 2% growth or “boomflation”? Count me in for “boomflation”.

Bond breakouts around the globe, JETS soaring and Commodity prices exploding all suggest better growth days ahead—betting on a Fed led recession just doesn’t seem like the right call. Easy financial conditions, JPM’s recession indicator quiet as a church mouse, relatively stable credit environment with cashed up companies & consumers all argue against it. Credit remains an important area to monitor—BofA expects significant US corporate credit upgrades in 2022—its ratings upgrade indicator stands at its highest level since 2010.

Are stocks going to go down and retest the January lows? They certainly could. Will we power ahead, boosted by strong earnings (especially in Europe) and cheap stocks as the S&P derates (now back to Spring 2020 levels at 19x forward EPS)? Its possible. US small caps are trading at 13x forward. Europe, Japan, China, Brazil all trade at big valuation discounts to the US; JPM highlights how European earnings have blown away the US Q4 # with EU Q4 EPS growing 44% y/y vs 28% for US companies.

The key questions remain: is tech led and US equity led global leadership over? Is it time for value, for non US equity, leadership? I think so.

I continue to watch the bombed out Thematic space for clues—the ARK Innovation ETF (ARKK) led, disruptive tech space which suffered what I believe will increasingly be seen as capitulation selling late last month. Some really smart folks I know and respect, disagree and believe stocks have much further downside, another 20-25% as the Fed tightens till something breaks. Some see ARKK trading as low as the mid 20s from roughly $70 today and last February’s peak around $160. 

I take the other side of that view and think the surprise could be as I noted last Friday, that we have another Spring rally much like we did a year ago, only this time there won’t be a Delta wave to knock us all back. ARKK, for example, now arguably represents strong growth (revenue growth +40% Y/Y) at quite reasonable valuations (under 10x EV/Sales).

I note that March & April represent two of the three best months of the year for US value stocks, and believe Covid’s shift from pandemic to endemic is not getting anywhere near the attention it deserves as a market driver over the coming months. You can feel the energy just walking the streets of NYC as the temperature climbs above 50 on a sunny Friday.

Imagine all that trucker convoy angst turned into fun times in the city? Okay, enough with the pop psychology, more importantly Macro Charts notes that roughly half of Nasdaq stocks have triggered buy signals, one of the strongest signals in history.

So, like the Moon, the market waxes and wanes, as we stare up at the sky and try to make sense of it all and our role in it…no one ever said this investing stuff was easy—well, no one but the GameStop bros anyway and we saw what happened to them…stick to the plan, follow the process, be like water.

Learn more about Jay Pelosky here.