Up Market Monday Streak Ends at Fifteen as We Navigate by the Stars Under Cloudy Skies

The S&P 500 just couldn’t hold on for a gain today ending the day down 7.12 points ending a fifteen week winning streak. The Monday streak has been an anomaly in what has been a down trending market since late August, as markets come off of the lows of March when we experienced the mini banking crisis that saw SVB bank closed.

The Federal Reserve is in a blackout period this week and it is just as well that FOMC members have a gag order in place as they have become a sideshow to the bond market that saw the U.S. 10-year treasury yield rise to 5.02% in the overnight market only to drop back to 4.84% on the back of Bill Ackman tweeting that he had covered his short treasury bets, saying ‘too much risk in the world’ to bet against flight to safety bonds.

The bond market has been very much in control of the markets over the last few months as markets begin to believe what the Fed has been telling us all along- that rates will remain higher for longer. The summer rally was largely momentum driven on the back of better than expected earnings coming off the recent March dark days where the first cracks began to show as we watched the mini banking crisis.

Bulls were greatly relying on three factors. Markets are now realizing that the thought of the Fed being forced to cut rates was wishful thinking and that something really bad in the economy would have to happen in order to have the Fed save the day once again. Now the only tailwinds that remain for markets are the old seasonal trade call or that indeed as Ackman call suggests, yields are at highs and that we will stabalize lower from the 5 per cent 10-year yield that the bond market seems destined to break through. Last week alone the U.S. 10-year jumped from 4.61 to 4.91 per cent.

As the Russell 2000 hits a new 52-week low today the headwinds grow stronger with consumer credit card losses (3.63%) rising to the highest levels since 2008. Low grade credit such as auto loans continue to show rising delinquencies and charge offs. Corporate bonds have gone from 3% to 9% in a very short period of time and they are on the verge of causing markets to see a second round of collateral damage resulting from the fastest rate hiking period ever seen.

On the fiscal side Treasury Secretary Janet Yellen quietly reported that the U.S. budget deficit was up 24% to $1.7 trillion. Debt ceiling talks will be of concern again in November and an already disfunctional government will with certainty continue spending at a time of high growth, just when it should be doing the opposite. The misspending of money by governments will be taken in stride by markets until they don’t. We have always known that fiscal spending on the back of easy monetary policy would not end well. The U.K.’s Theresa May found this out the hard way as the first soldier downed by a market that can turn on a dime when the spending party is over and bill needs to be paid.

With the U.S. going into an election year with Trump and Biden holding the top spots respectively for the two U.S. Presidents that spent the most money all time, look for markets to soon take over and call all the shots going forward in a fight where the Fed will be out of bullets having fired off all the ammunition they had- a mistake that will render the central bank hostage.

Employment is one of the last fighters standing and shows signs it will soon roll over. A tone deaf Fed and Central Bankers are intent on breaking corporations under the stress of rapidly choking high yields. Our addiction to structural deficits mollycoddled on negative to low rates for the last fifteen years will see debt service begin eating up significant chunks of the budget as more countries join the acronym nation PIGS.

When you add all the geopolitical risks including two wars it is safer to bet that this holiday season will not be a happy one for markets and will be more reminiscent of December 2018 when markets crashed 20% plus on Christmas week.

Year to date the S&P has risen almost 14%, but excluding the magnificant seven the S&P has risen only half a percentage point. We have earnings coming up this week from two of the Mag-7, Alphabet and Meta that will give us a read on the all important advertising market.

Aside from watching Taylor Swift, watch rates and watch the Magnificent seven. Childboy and crash pilot Jerome Powell and his fellow fed heads will be ‘Navigating by the Stars Under Cloudy Skies.’