Howdy readers. I’m Phil Rosen, reporting from Manhattan.
Remember the whole “good news is actually bad news” relationship between the economy and markets?
Well, yesterday we learned private sector economic activity clocked in at multi-month highs, which means businesses are gaining momentum.
But stocks dipped on the news because the strength of the data suggests the Fed’s interest rate hikes haven’t been all that effective — which ups the odds for higher-for-longer rates and more hikes.
Today’s Fed minutes release should provide more insight on what’s to come in March.
In any case, despite yesterday’s sell-off, the swath of persistently-hot data hasn’t weighed on markets as much as you’d expect — and that’s leading some of Wall Street’s heavy hitters to warn that a reckoning is just around the corner.
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1. The bulls have showed out in force this year amid 2023’s strong rally, but their optimism may be outweighed by the grim prognostications of a single analyst.
Morgan Stanley’s Mike Wilson is one of Wall Street’s most prominent bears, and he just made a bleak comparison between the recent strength in stocks and climbers scaling Mount Everest without considering the risks.
“Many fatalities in high-altitude mountaineering have been caused by the death zone, either directly through loss of vital functions, or indirectly by wrong decisions made under stress or physical weakening that lead to accidents,” Wilson wrote.
“This,” he continued, “is a perfect analogy for where equity investors find themselves today, and quite frankly, where they’ve been many times over the past decade.”
So according to Wilson, stocks have entered this death zone after climbing too high too fast in hopes the Federal Reserve is about to pull back on its aggressive monetary policy.
He’s reiterated several times this year that the rally will lose steam, and he expects sticky inflation to push the Fed to hold interest rates higher for longer.
“The bear market rally that began in October from reasonable prices and low expectations has morphed into a speculative frenzy based on a Fed pause/pivot that isn’t coming,” Wilson maintained.
But with the rally leading more investors to the “fear of missing out” trade, the fallout will ultimately be even worse, especially as strong economic data continues to roll in.
Meanwhile, Bank of America strategists cautioned that all of the S&P 500’s year-to-date gains could be wiped out in early March.
“Payroll, retail sales, inflation; mission very much unaccomplished for Fed despite 450bps tightening,” according to BofA.
The bank’s analysts now see the Fed raising rates by 25 basis points in June, which would bring the terminal rate to a target range of 5.25-5.5%.
At that point, BofA expects a hard-landing to follow.
“As [stocks] have reached even higher levels, there is now talk of a “no landing” scenario – whatever that means,” Wilson noted. “Such are the tricks the death zone plays on the mind – one starts to see and believe in things that don’t exist.”
What’s your recession outlook and how are you positioning your investments to prepare? Tweet me (@philrosenn) or email me (email@example.com) to let me know.
In other news:
2. US stock futures edge higher early Wednesday, after taking a battering yesterday thanks to investors’ fears that interest rates will stay higher for longer. They’re waiting for the latest Federal Reserve minutes due later for any hints to their future path. Here are the latest market moves.
3. On the docket: NVIDIA, Lloyds Banking Group, and eBay, all reporting.
4. A former BlackRock stock chief said the S&P 500 could fall another 17%. Investors are ignoring the growing number of tell-tale recession signals, Bob Doll explained. Here are the downbeat harbingers that are “not talked about at all.”
5. The chairman of Credit Suisse is facing a probe over comments that potentially misled investors about client fund outflows. Reuters reported that the Swiss regulator is looking into whether Axel Lehmann made misleading statements amid rumors of a Lehman Brothers-style collapse. Here’s what you want to know.
6. I asked ChatGPT for book recommendations that could make me a smarter investor. The language bot shared five titles, including two names with ties to Warren Buffett. See the full list.
7. History’s most reliable recession indicator no longer works. The inverted yield curve has long predicted a downturn, but Ned Davis Research said that’s no longer the case. Strategists explained that banks’ high level of cash reserves means they are less reliant on short term borrowing to fund longer-term loans.
8. This real estate investor owns over 1,200 units and retired at age 36. Dave Allred was able to stop working just 13 years after purchasing his first property. He explained how he’s been able to “reverse engineer” his financial freedom.
9. Meet a 28-year-old Amazon seller who sold $5 million worth of wallets in a year. When it comes to boosting Amazon sales, Joe Reeves said you have to start with a great product and accumulate positive reviews. After scaling his business to over $1 million in revenue, he broke down his four keys to e-commerce success.
10. Meta stock looks attractive after Mark Zuckerberg copies Elon Musk’s subscription model. Strategists at BofA said the new service for Facebook is a “potential high margin business.” In other words, now that paying users have the option to get a verified badge, shareholders have reason to cheer.
Curated by Phil Rosen in New York. Feedback or tips? Tweet @philrosenn or email firstname.lastname@example.org.
Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London.