Equity Market Stress Rising – Time to Consider Reducing Risk

As we detailed in great clarity on February 21, 2024, “Rate Cuts Appear Out of the Question.”  Now key market players begin to draw the same conclusion:
 

Wow.

Another HUGE call from Apollo this morning:

"The Fed will not cut rates this year, and rates are going to stay higher for longer."

Apollo says the US economy is not slowing down, and the Fed pivot has provided a strong tailwind to growth since December.

They also note… pic.twitter.com/2JayRuUub4

— The Kobeissi Letter (@KobeissiLetter) March 1, 2024

While Apollo is clearly on point with sticky inflation and the Fed’s need to deal with it throughout the balance of the year at least, Apollo’s expectation of continued growth is subject to a particular caveat; much of the purported growth is phantom growth resulting from inflation data manipulated downward.  We previously reported on the methodologies applied by the Bureau of Labor and Statistics (BLS, or BS for short) where through the aggressive application of largely qualitative hedonic adjustments as well as substitution, BS manipulates inflation measurements downward – and to the extent inflation artificially falls, real GDP artificially rises.

See https://conservativeofficial.com/articles/the-means-for-bls-manipulation-of-inflation-and-gdp

Nonetheless, Apollo’s inflation concern does reflect a rising recognition of substantially higher market risk relative to current market expectations of 2-3 cuts.   As other market participants adjust expectations to fewer and fewer cuts, markets will ultimately reflect the higher expected interest rates and discount stocks deeper.  As markets price in these reduced expectations, stocks likely will fall. 

When we combine this rising risk with our earlier article this morning stating that the Fed’s ON RRP is running dry and therefore will no longer fuel the equity market rise, these factors combine to increase risk in the equity markets.

While further gains from irrational exuberance may accrue and calling a peak is difficult, on balance, this is a time to consider reducing risk in stocks.