Curiouser and Curiouser
Why are US stocks holding up so well?
We have a bit of an escalation in Iran, but US stocks are taking it pretty well, particularly considering how far they’ve moved over the last month. By contrast, a lot of Treasury bonds are nearing lows, as oil lifts 4% and increases concerns about sustained inflation.
Along the lines of what I said yesterday, in theory, higher inflation fears should hit growth stocks, but that’s been pretty calm, overall. I’d theorize that the growth impulse we’ve been seeing is winning the fight, with the Atlanta Fed GDPNow at 3.5%, for example.
Additionally, the higher inflation can help reduce real rates, assuming the Fed isn’t expected to hike rates in response to the inflation fears. That’s currently the case, with rate hike chances rising but still not expecting a hike. In turn, lower real rates reduce the cost of money.
In a vacuum, lower real rates are a powerful stimulant for stocks. Back around 2021, you can see we had steeply negative real rates (blue) and the stock market (green) took off. Negative rates are a powerful stimulant for a bull market.
That said, the reason why rates are negative and the conditions surrounding it are important. If real rates are going down due to a slowdown, you’re risking an inflation trade. If the inflation fear becomes too high, markets will start to fear rate hikes. It’s a delicate balance.
In this case, so far, the market is threading the needle. There are certainly concerns, but real rates, thus far, are helping to support markets. This certainly doesn’t have to last. The market can decide that the problems are too grim and sell. Instead, strong earnings and good data are working with real rates to keep the stock party going.
One of the reasons I’ve been quick to remain largely bullish is the thought of what may happen when and if Iran concerns are dealt with. When that happens, oil should go down, inflation fears should fade, and the Fed will be much freer to drop rates.
I’m not saying we’re going to repeat the 2021 experience, but in my mind the conditions rhyme. The market seems pretty open to the possibility, as well. If the market told me I was wrong, I expect I’d be more circumspect in positioning, but effectively the market is egging me on.
The point is that I don’t think most investors realize the market is more supportive to markets than they may think. Further, if we can deal with the Iran worries, the potential is there for a strong rally that would find many out of position and chasing. Of course, that doesn’t have to happen, but it’s worth seriously considering.