Market Note: New Bull or Bear Market Rally

August 10, 2022Market Note: New Bull or Bear Market Rally

  • The “pain trade” rally we outlined in Market Scenarios & Risk Levels is well underway with Technology stocks and high yield bonds up 15.2% and 7.0%, respectively, since July 6.
  • The rally has cleared excessively bearish sentiment, which is no longer at levels historically associated with significant upside in stocks.
  • The Treasury yield curve, as proxied by the 2s10s spread, is inverted by 37 basis points and suggests growth is slowing sharply while real-time inflation forecasts suggest inflation could remain stubbornly high in the coming months.
  • A Fed pivot would be positive for risky assets, but inflation is far from the Fed’s target and they may need to tighten further into a sharp slowdown against a backdrop of above average valuations—we believe patience and some caution are still warranted.
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