1/ Taking Your Lunch Money
2/ Dollar Getting Stronger
3/ Trouble with the Curve
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1/
Taking Your Lunch Money
I wasn’t counting on the Core Personal Consumption Expenditures (PCE) report to make any difference for inflation expectations among investors. So I wasn’t surprised, and you shouldn’t have been either, when the market basically ignored it and did what it wanted to do anyway.
It is possible that somehow, the little kids could get together and turn the tide of the markets by standing up to the three bullies on the block, but Hollywood fantasies aside, that is an unlikely scenario.
An equal-weighted portfolio of Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA) would track a theoretical index comprising 25% of the influence on the Nasdaq 100. These three are the proverbial big kids, and they say the game is downball, then down it will be. Since the beginning of the year, these three have weighed down the tech-heavy index, much to the chagrin of bullish investors everywhere.
Think the PCE report will tell us that the inflation flood has receded enough that the Fed can lower rates and make everyone happy again? Bought a dozen eggs lately?
2/
Dollar Getting Stronger
Here is a subtle signal that troubles me. To understand it, I need for you to first recall that when US stocks start tanking, the US Dollar typically strengthens. Seems counterintuitive that if an economy is faring poorly its currency should strengthen. But the greenback is the exception here.
The British Pound, the Euro, and the Australian Dollar have all lost momentum against the US Dollar. Why is the dollar strengthening right now? Because enough investors are moving their money out of stocks and into cash. That’s right, plain old cash–even Warren Buffet’s hoarding it.
When the demand for stocks decreases, and investors are worried about prices going lower, they don’t go putting their money into something other stock, they put it into cash. This drives demand, even if only in the short term, for the dollar.
The fact that we are seeing the dollar strengthen against other major currencies is a pretty good signal that cash hoarding is in vogue right now. And that means buy-and-hold, for the moment, is out.
3/
Trouble with the Curve
It’s been about two years since the last time the inverted yield curve made headlines. Scary predictions of the worst recession yet because of the longest and deepest yield curve inversion on record. Nevermind that a sample size of four functionally nullifies the meaning of any indicator, pundits and analysts alike were happy to talk about what it could possibly mean.
Funny thing happened on the way to the recession, the market didn’t drop. With the curve out of the negative territory we are out of danger, correct?
Not so fast. The last time an inverted curve showed up, it took 11 months before the recession did. Given that the recession indicator (two consecutive quarters of falling GDP) naturally has a 6-month lag, it only makes sense that the impact of inverted yields would take a while to have an impact on the markets. It could still be in the works somewhere between now and the summer months.
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Originally posted 28th March 2025
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