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Markets Seem to be in a Holding Pattern: Market Commentary from Cabana’s CEO – May 24, 2024 

2 months ago

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This week we have seen the broad stock indices take a break and pull back following the recent bounce back above their 50-day moving averages. Bond yields have crept higher as well. The correlation between stocks and bond yields is no coincidence and is the result of continued restrictive Fed (the Federal Reserve) policy (high federal funds rate) in the face of inflationary pressures and a still inverted yield curve, whereby short-term interest rates are higher than long term interest rates. The inverted yield curve portends a weaker economy going forward. It is this conflict that has bond yields and stocks positively correlated. This will likely remain the case so long as the yield curve remains inverted.  

So, how do we get the yield curve un-inverted? One way is for us to have rising unemployment and accompanying recession. That will cause the Fed to drop short-term rates – and perhaps rapidly. Unfortunately, that scenario will likely drop stocks as well (at least over the short term). The second way is the so called “soft landing scenario” whereby the Fed cuts short-term rates not so much out of necessity but rather as a result of inflation continuing to moderate, and in an attempt to return the yield curve to normalcy. I believe it is the latter scenario that is priced in right now and why we are seeing the market cap weighted indices hanging around new highs. Ultimately, the longer this drags on, the more uncertain things look. As such, whenever we get hints of “higher for longer”, bond yields rise while stock and bond prices fall. This dilemma keeps us bouncing around. All the while earnings continue to come in strong. We got NVDIA earnings Wednesday and they again beat expectations with triple digit growth on the back of AI demand. It appears artificial intelligence is what has kept technology leading the way to the upside.  

Fun fact: the current yield curve inversion is the longest on record (US Treasury key yield curve inversion becomes the longest on record | Reuters). 

We need to get some cool inflation figures coupled with some cool jobs reports in between now and the next Fed meeting in July. Not COLD numbers, just cool numbers. That gives the Fed room to cut and drop short term rates. If we can maintain decent GDP growth at the same time, we get the soft landing and a goldilocks scenario heading into 2025. Of course, this is a big ask, and there are other variables like our domestic politics and foreign wars to threaten things as well. All in all, we seem to be in a bit of a holding pattern – yet holding higher, which is good.  

At Cabana we are bullish and allocated accordingly across portfolios. 

Key terms:  

  • A goldilocks economy has steady economic growth, preventing a recession, but not so much growth that inflation rises by too much.  
  • Gross Domestic Product (GDP) is a monetary measure of the market value of all the final goods and services produced and rendered in a specific time period by a country or countries. 
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January 17, 2024

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All indices and categories are unmanaged and an individual cannot invest directly in an index or category. Index returns do not include fees or expenses. Benchmark indices will likely materially differ from Cabana’s portfolio strategies. Detailed information as to how the returns are calculated can be obtained online from the following link: https://thecabanagroup.com/disclaimers/performance-reporting-methodology/. 

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The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq