Closing Thoughts for the Week

The conditions remain for a continuation of the melt-up in stocks, but the probability of such an outcome took a hit this past week. One possible catalyst could have been the Fed reminding us that the rate hiking cycle isn’t over yet. One thing to watch here is the inversion of the Treasury yield curve. The data suggests a recession happening somewhere around Q4 2023 to Q1 2024.

I’ve been arguing that the melt-up scenario was a real possibility over the past 2-3 weeks. Last week’s October inflation report was that catalyst. This rally hasn’t been nearly as strong as the summer rally, but it’s got a potentially better catalyst to push it higher. Sentiment looks like it’s notably more positive here and the VIX just had its lowest close since late August.

Investors got burned again hoping for the Fed to soften its stance. That being said, I don’t think the rally possibility from here is over yet. There are a lot of underlying signals saying that we’re kind of on the same trajectory as before. This could be the environment where emerging markets finally start to take the lead.