Over the weekend I was chatting with an industry colleague who is usually bearish. He’s a glass quarter full kinda guy, but super, super bright and always has high conviction. At the beginning of the year we had this fierce debate about how 2023 would treat the stock market. You already know how bullish I was. His position was that there was no way stocks could rally simply because the Fed was selling assets from its balance sheet to the tune of $50-$90 billion a month depending up the situation. After all, any time the Fed was buying mortgage securities or treasuries, stocks always rallied. So, the reverse had to be true.
Except that facts are not in evidence.
Yes. Stocks did well during asset purchase phases. But those phases were also times of stress in the system. Perhaps, economic troughs as well. Did stocks go up because the Fed was buying in general or did stocks go up because the purchases greased the skids in the system? Does it really matter? We do know that the reverse hasn’t been true, at least in the last 9 months. Jay Powell selling tens of billions in securities has not prevented nor stopped the rally. Be careful drawing conclusions without proper substantiation.
It has been a great 9 month run. The bull market is young and it has not reached its potential. However, after such a strong run, there is the inevitable pause to refresh or mild to modest pullback. I don’t think we’re in the “modest” camp just yet. As I wrote about last Friday I am tempering my exuberance for now, but not turning negative or even neutral. We’ve taken down our tech exposure on the sector side and rotated into indices that have lower risk and excitement, like the Dow Industrials and some low volatility instruments.
On Friday we bought PCY.and REPIX We sold EMB, BKPIX and levered S&P 500.
