July 2024 Market Strategy
An update on CPI, fiscal flows, monetary policy, investor sentiment & positioning and FX dynamics
Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.
As a recap, in my June 2024 Market Strategy article, I wrote that the latest CPI print was finally friendlier than those before and that more disinflation data is likely to come as the year unfolds. I also mentioned the underlying decline in public deficits remains intact even with headline data seemingly pointing to a reacceleration. Positioning data had remained mixed as the earlier ‘landing’ trade had to be unwound with a new consensus yet to be build. I concluded that this environment will likely be very productive for stocks and bonds alike because there is room for a positive surprise for rate cuts which will be very effective in stimulating cyclical industries.
How as this picture evolved since then? Let’s look at investor sentiment and positioning, CPI data, monetary policy and fiscal flows as of July 2024.
TLDR Summary
Inflation data and fiscal deficit data continue to signal that there is room for the Fed to cut. Rate cuts are the path of least resistance because there are perceived tail risks in keeping them high for too long, particularly with respect to financial system stability.
Investor positioning and sentiment continues to send mixed signals. Investors are optimistic, but far from being exuberant. There is no overbearing crowd betting on a particular scenario. We have to wait for a new crowded trade to show up. For the time being, risk-on remains the obvious choice.
The Fed’s rate gymnastics have pushed the US Dollar much above fair levels when compared to other major currencies. This is a very clear signal that there is a huge carry trade beneath the surface that will soon blow up. This come with both risk and opportunity. I believe FX markets will frontrun monetary policy to inflict maximum pain on carry traders. A US Dollar devaluation will then be a tailwind to S&P 500 earnings which would be positive for stock prices. However, an unwinding carry trade also causes deleveraging which is typically not good for asset prices. I have not fully made up my mind about this topic, but I am paying attention to it.
Aside from this risk factor, this bull market has all ingredients to last for years. However, it won’t always go up in a straight line like it has done recently. Corrections will happen. Anticipating those is important. Buying the dip can generate alpha and mental preparation can avoid dumb decisions. When the time is ripe, bears will be loud to seduce weak minds into selling at the worst time. I believe there is a decent chance that 2024 will somewhat rhyme with 2019. The first rate cut alongside economic resilience will make the bull case obvious enough to compromise it temporarily. It would be the perfect moment for an intermediate top, especially if it happens alongside fiscal and political catalysts.