VRA Investment Letter: The Worst Week for Stocks Ends. Roaring 2020's; US Economy Remains Strong.
/Good Friday morning. The worst week of the year for US equity markets ends today, punctuated by this weeks FOMC meeting/statement and J Powell presser, which…once again…led to a steep sell-off in stocks…Powell’s speciality.
The phase that’s made the rounds, with respect to Powell and the Fed’s forecasts, is that they are guilty of “wish-casting”, AKA “making it up as they go along”.
Everyone reading this will remember the Fed’s nonstop, nauseatingly-wrong forecasts of Q1 2022 that “inflation would be transitory”.
You’ll have to forgive us for doubting the Fed’s latest predictions that we’ll have only two rate cuts in 2024 (vs their June forecast of four) and that rates will be “higher for longer”.
However, we do agree with the Fed on their discovery that “the economy is stronger than we thought it would be”.
As we’ve covered in these pages often, and in our book “The Big Bribe”, with thanks to the Trump Economic Miracle (tax cuts, 1000 cuts to regulation and America 1st, anti-China polices/tariffs) to go along with $7 trillion in post-rona-stimulus and additional $4 trillion in QE, the US economy will continue to grow.
Led by housing (all-time highs in home valuation), record household net-worth, the remarkable “American deleveraging” story of the last 15 years, a record $7 trillion sitting in money market funds, 4.4% wage growth (year/year, which has helped to offset inflation), the “America that matters” (68.8% of Americans own a home) will continue to power the US economy.
In addition, corporate earnings growth has resumed its upward trend, which should be crystal clear next month as Q3 earnings reports begin.
Going Forward: we expect the combination of disinflation (aided by the deflation being exported from China), combined with the “demand destruction” of a 5.5% Fed funds rate and 7.5% mortgages, will soon begin to impact the economy to the point of driving down interest rates. This is the demand destruction from the “lag effects” of Fed rate hikes, even as it butts up against the never-before-seen levels of liquidity/deleveraging in the system from Fed money printing (QE) and Trump/Biden stimulus programs. This is the ongoing battle that’s taking place in the bond market. Our view remains unchanged that the Fed’s unrelenting 11 straight rate hikes from last March will soon begin to fully kick in. The power of “lag effects” and the “innovation revolution” will result in “deflation” going forward. This will be followed by Fed “rate cuts” in 2024.
How We Want to Play It: we are witnessing a “great reset” of a different kind, as the next several years will bring deflation and MUCH lower rates.
- Bonds are a fabulous buy here, certainly in the 4% + levels of 2 to 10 year bonds. We see rates “plummeting” lower.
- Tech stocks and semis will also be a primary beneficiary of deflation and lower rates. They will continue to lead the markets..and lead hard.
- Precious metals and miners…which have been hit by a rising dollar and rates…will have a remarkable move higher in this future of lower rates, deflation and continued move lower in the US dollar, which has entered a long term bear market.
VRA Bottom Line: we are in the Roaring 2020’s. With low debt levels (consumer/corporations), record home prices, liquidity and easy access to capital, smart money investors should continue to weigh economic progress versus the ongoing “PSYOP of negativity”. We will continue to use weakness to “buy the dip”.Current market weakness may continue into “October-phobia”, where the data tells us (going back to 1950) that this “pause” in our new bull market may live on until early-mid October. We see an extraordinary buying opportunity approaching for our VRA broad market ETF’s, as Q4 brings a strong end of year rally that will continue into Q1 2024 (election year).
Charts To Watch
Below is the relative strength chart of the semis to the S&P 500. The semis have led the markets higher from the bear market bottom of 10/13 (the semis lead in both directions).
Once the semis bottom and make the turn higher we will resume our aggressively bullish views for US markets. We watch the semis like a hawk.
Note: the semis have hit heavily oversold levels on our shortest term momentum oscillator now (stochastics). We will begin aggressively adding to positions should we hit extreme oversold on VRA System.
S&P 500
SPX has broken through short term support levels and may see further weakness to the 4200 level (3% lower from here).
Should this move lower take place it would also take SPX near its 200 dma.
Note that we are hitting heavily oversold levels on our shortest term momentum oscillator now (stochastics). Within a week or less, should weakness continue, we will hit our most oversold designation (extreme oversold on steroids,or EOSOS). Now is the time to make your shopping lists. Should we hit EOSOS on our broad markets and in the semis, we will be “backing up the truck” to go aggressively long.
Sentiment is Flipping to Fear
This is what we want to see. The Fear & Greed Index is back to 42 (fear). We’re seeing similar moves in multiple sentiment indicators (AAII, etc).
We want as many bulls as possible to flip to bears. We’re certainly seeing permabears come out of hibernation. Sentiment is doing its thing.
Reminder: Join us for two free weeks at VRAInsider.com to review the VRA Portfolio, VRA Special Reports and to ensure you are positioned correctly.
Until next time, thanks again for reading…
Kip
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