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Surge in Growth Could Reignite Inflation

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By Murray Dawes, Saturday, 10 February 2024

The favourite line of commentators that falling rates is bullish for stocks, isn’t always true.

There has been a serious loosening of financial conditions over the past six months as markets prepared for interest rates to peak and then start falling in 2024.

US and European production growth is responding to better financial conditions despite the fact the Fed hasn’t even started cutting rates yet.

The possible fly in the ointment is if growth takes off like a rocket and inflation becomes a problem again.

But with the S&P 500 rallying strongly into record territory, the short-term outlook remains bullish.

Keeping an eye on US 2-year and 10-year bond yields is important as we move forward, because a further jump in growth may see yields starting to rise again.

The Fed is probably fretting about the loosening of financial conditions and came out recently trying to jawbone the market down by saying rates were going to stay ‘higher for longer’.

The market is ignoring the Fed for now, as upside momentum has taken on a life of its own.

In today’s Closing Bell video I have a look at the US 2-year bond yield over the last few decades and compare it to the moves in the S&P 500.

As you’ll see in the video, the favourite line of commentators that falling rates is bullish for stocks, isn’t always true.

If something breaks due to a long period of elevated interest rates, stocks plunge and rates follow stocks lower.

Chinese stocks have seen serious selling pressure recently and the liquidation of Evergrande opens up the possibility of further contagion in the Chinese real estate sector. US commercial real estate remains under a cloud and if rates stay high for an extended period, there is increasing risk that something breaks in that sector.

So despite the rosy picture that makes the odds of higher prices in the short term a good bet, there are dangers lurking in the shadows that investors should be aware of.

Regards,

Murray Dawes Signature

Murray Dawes,
Editor, Retirement Trader and Fat Tail Microcaps

All advice is general advice and has not taken into account your personal circumstances.

Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

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Murray Dawes

Murray Dawes is our resident expert trader and portfolio manager. He is a former Sydney Futures Exchange floor trader who went on to design custom trading systems and strategies for ultra-wealthy clients (including one of Australia’s richest families). Today, his mission is to help ordinary Aussie investors make profitable investments, while expertly managing risk.

He uses his proprietary system for his more conversative and longer-term-focused service Retirement Trader…and then applies the same system to the ultra-speculative end of the Australian market in Fat Tail Microcaps (this service is strictly limited and via invitation only).

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All advice is general in nature and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

The value of any investment and the income derived from it can go down as well as up. Never invest more than you can afford to lose and keep in mind the ultimate risk is that you can lose whatever you’ve invested. While useful for detecting patterns, the past is not a guide to future performance. Some figures contained in our reports are forecasts and may not be a reliable indicator of future results. Any actual or potential gains in these reports may not include taxes, brokerage commissions, or associated fees.

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