Outlook: The strong start to the year for risk has been bolstered by a fiscal impulse into the real economy in conjunction with the Fed’s refusal to get too hawkish. Inflation has shown only a moderate increase in the previous two months and must now fight against a backdrop of month over month Core CPI readings beginning last March of .5%, .4%, .4% and .4%. My bet is inflation comes in lower over the same period this year, slowing the rise in risk but not stopping it.
Equities: I stand by my call that a rotation out of large cap tech will drive outperformance in small caps over the coming months, as measured by IWM vs the QQQ. IWM’s 2.11% relative outperformance in March is just the beginning. Meanwhile the S&P 500 will continue to grind higher but at a slower pace. Bullish.
Dollar: Flat consolidation will continue to define the action of this market. There is some evidence of a saucer bottom but falling yields and nominal GDP will check any rise in the DXY. Neutral.
Fixed Income: The long end of the treasury curve looks exhausted and will drift below the long-term moving average (200D). The Fed’s commitment to three rate hikes adds pressure to the shorter end of the curve despite the upside blip in inflation. Inflation will fall, as will yields. Bullish high yield corporates.
Commodities: the commodity complex has continued to rise since I called for the appearance of a bottom formation. This has largely been driven by the slow but steady assent in crude and RBOB gasoline. I think this will ultimately prove a bear trap, however some room for continued appreciation would not be out of the cards nor would it invalidate my longer-term disinflation theme. Neutral.
Crypto: After an unrivalled start to the year, I am not as bullish as I once was. While BTC halving events are typically followed by prolonged upward move, the degree to which market participants expect this action leads me to believe much has been priced in over the short term. Couple this with the fact that, historically, the halving is preceded and sometimes immediately succeeded by a sell off and we have the ingredients for some pain. I’m cautiously bullish with all long margin trades off the table.
