A Goldilocks scenario for equities?
It seems like things are just right for equities to stay ripe
US futures may be a touch lower on the day but it comes hot on the heels of solid gains yesterday with record closes for the S&P 500 and Dow - the latter even breaking another milestone, breaching the 34,000 level.
As things stand, conditions are looking just right for equities to keep pushing higher but one can argue that said window is starting to close.
Price levels relative to valuations are outworldly and day by day, the Fed is getting closer to moving away from more accommodative policy - barring any major hiccups.
That said, the conditions at the moment may be just right for equities to keep the party going before the punch bowl dries up and the Fed takes it away.
- The rout in Treasuries is starting to settle down. The market has had plenty of reasons and reference points in the past two weeks (since the March non-farm payrolls report) to extend the push higher in yields but instead, things have turned the other way around. Profit-taking may be part of the picture but it also indicates that market participants are sticking with a shift in the narrative i.e. to one that is waiting for more consistently robust US economic data, before hopping back on the bigger picture trend that has been established in Q1.
- US economic data continues to outperform. It may only be early indications of a sharp rebound as the vaccine rollout gathers pace, but it is encouraging. If the data continues to run hot in the next couple of months going into Q3, that is going to keep the debate on inflation/Fed tightening rather lively in the next few months.
- The Fed is still doing what it has been doing since last year. And that is keeping the printing press running in overdrive. We have seen the power of easy money and what it can do over the past twelve months and while there are stronger opposing forces now than before, it still doesn't take away a key fundamental tailwind for equities and risk trades as the Fed sticks with existing easy policies.
So, with the reflation trade taking a significant breather even as US data runs hot and the Fed still going BRRRR!!, it seems very much like equities are experiencing a Goldilocks scenario since late March which has now carried over into April.
Earnings season will present its own challenges over the next two weeks for equities sentiment but barring any changes to the macro picture, things are still looking rather bright for stocks now - besides the odd technical correction every now and then.
Just be wary of seasonals as well, with the old adage "sell in May and go away", though I'd argue such a saying doesn't apply all too much in unprecedented market environments such as the ones we have been facing over the last one year.