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The Fed Raises Rates Again, Technicals Say We are in a New Bull Market: Market Commentary from Cabana’s CEO – July 28, 2023

1 year ago

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Wednesday, the Federal Reserve concluded its July meeting and raised the Fed funds rate by another 25 basis points. We are now sitting at 5.25-5.50%, which is the highest level in 22 years. Chairman Powell left additional hikes on the table during his press conference. The Fed’s actions and rhetoric continue to put pressure on bonds and other fixed income assets. This follows one of the worst years in history for these once viewed as “safe” assets. The major stock indices on the other hand have brushed aside all the potential negatives associated with rates having now jumped 525 basis points in just over a year and have continued to climb out of the bear market hole they found themselves in. The Nasdaq has led the way on the back of the so called “magnificent 7” mega cap technology stocks. These stocks include Apple, Meta, Amazon, Microsoft, Tesla, Google and Nvidia. All these were down 30-50% last year, so a big rally during the first half of the year may have been due.  

What is better news is that we have begun to see other areas of the “market” catch up. I have mentioned this breadth issue many times and it continues to improve. The most obvious example is that we have seen the Dow Jones Index (DIA) begin to make up lost ground and has been positive 13 straight days as of this writing on July 27. The equal weight S&P 500 has also outperformed the market cap weighted version over the past month (see below chart). This means other parts of the economy are now participating in the rally. The same can be said for small and mid-cap stocks. We also just got a Dow Theory buy signal as evidenced by both the Dow Industrials and Transports breaking out into new uptrends together. This is all good news in my opinion and suggests markets can move higher over the course of the next six months.  

My optimism is supported by continued underlying resilience in the economy all while inflation is trending lower. It is to be expected that the historic rise in interest rates would bring down inflation (after all that is why the Fed is raising them), what is remarkable is that it is occurring without any apparent ill effects on GDP growth, corporate earnings or employment. GDP and employment numbers came in this morning better than forecast again. I think most economists (and investors) out there are dumbfounded and left scratching their heads because history (and the inverted yield curve) would suggest the economy is going to be impacted in a big way by the pressure on demand coincident with tightening credit conditions. History says we would see a jump in unemployment and a recession. So far that just hasn’t happened, and stocks reflect that. I think no one can successfully model or predict the results of the pandemic and the fiscal and monetary policies that accompanied it. We have just never in history seen anything like it.  

So, we are left with the technicals. The technicals say we have entered a new bull market as of late spring. The volatility index (VIX) agrees and is now at pre pandemic levels. As such, the market is bullish until proven wrong, despite all the arguments to the contrary. 

At Cabana, we are currently in our Transitional Bullish (improving) scene.  

Equal v. Market Cap Weighted S&P 500 Performance Over the Past Month 

Source: Stockcharts.com  

Disclaimers

January 17, 2024

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of Cabana. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

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Past performance is no guarantee of future results. All investment strategies have different degrees of risk and the corresponding potential for profit or loss. Asset allocation and diversification will not necessarily improve returns and cannot eliminate the risk of investment losses. “Target Drawdown” is merely a descriptive term used to describe the general strategy and objective of the portfolio, it is not a guarantee, nor should it be construed to suggest safety or protection from loss. There is no guarantee that portfolio performance will remain consistent with the targeted drawdown parameter. While risk tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account and there is no guarantee that Cabana’s strategies will be suitable for any investor. Investors and advisors should not simply rely on the name of any portfolio to determine what is suitable. It is the responsibility of investment advisors to determine what is suitable for their clients. Cabana manages assets on multiple custodial platforms. Performance results for specific investors will vary based upon differences in associated costs and asset availability.  

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Commonly used index/benchmark definitions:  

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/. 

Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. 

The S&P 500 Index is a market-capitalization weighted stock market index of 500 widely held large-cap stocks often used as a proxy for the U.S. stock market.  

The Russell 2000 and 3000 indices are market-capitalization weighted stock market indices that include, respectively, 2000 and 3000 of the most widely-held stocks and are often used as proxies for the U.S. stock market. 

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