Managing Editor’s Note: Tech investing expert Jeff Brown says on July 23, a historic convergence is set to usher in the next “golden age of biotech.” When we’ve seen “golden” periods in the past, you could have doubled and tripled your money over and over again.
Now we’re on the cusp of the next period… and it could be the biggest one yet. That is why Jeff has created an AI trading system designed to spot big biotech moves – days in advance. And on July 1 at 8 p.m. ET, he’ll tell you all about it.
If you want to learn more, then be sure to RSVP right here with one click to put your name on the guest list.
Over the past week or so, the major indexes have been pushing back toward all-time highs.
The move reflects the sheer scale of buying momentum since the stock market bottomed out in March. The AI rally has driven a big part of that.
The excitement surrounding SpaceX’s IPO added further fuel to the uptrend. And with other high-profile IPOs incoming (such as OpenAI and Anthropic), investors are scrambling to get in line for a piece of these transformational companies.
Yet this type of optimism can quickly morph into euphoria. When I see everyone crowding into the same trade, history tells me to be cautious. Reality has a brutal way of jolting complacent investors out of their slumber.
That’s especially relevant right now. Something shifted last week, which puts the rally at risk…
Last week’s Federal Reserve meeting marked Kevin Warsh’s first as chair.
The decision to leave interest rates unchanged came as little surprise. But the change in tone at the meeting was a wake-up call.
Warsh made it clear that inflation remains the Fed’s primary concern. And it’s not hard to see why…
Consumer Price Index (CPI) inflation is running at 4.2% year-over-year, more than double the Fed’s long-term target. Meanwhile, the labor market remains resilient, and the economy is powering along.
That’s not the type of environment to entertain rate cuts. In fact, the Fed’s latest projections pointed to the opposite.
Nine Fed officials are now expecting at least one rate increase by the end of the year. That’s a dramatic shift from March, when not a single policymaker was forecasting a hike.
That’s telling you that the Fed thinks the inflation battle is far from over. The bond market appears to be backing that view, with Treasury yields still hovering around 4.5%.
Yet exuberant investors seem reluctant to accept that…
To be clear, I’m not calling for an imminent market collapse. Bull markets can last much longer than you might expect – hype and euphoria don’t dissipate in the blink of an eye.
But there is a growing disconnect between the market and reality.
Stocks are still pricing in a scenario where the AI rally has room to run. Many assume the “transformational” tech companies are going to keep pulling more capital (and buyers) into the market.
Plus, oil prices are much lower than at the peak of the Iran conflict. So some believe the impact on inflation will be temporary.
Yet as we saw last week, the Fed is pricing in the possibility that inflation will remain elevated and take longer to contain. A potential rate rise (or even two) could be in the cards.
These are two very different views. The market seems to be underestimating just how hawkish Warsh might be.
History shows that when the stock market battles the Fed, it comes off second best. We saw that in the 1970s when the Fed was forced to keep tightening despite repeated hopes that inflation had been defeated.
It also happened in 2022 when the Fed had to keep tightening rates when inflation didn’t prove to be “transitory.”
Given the huge growth and valuations being placed on market leaders, stocks are at risk. Higher rates mean stocks are susceptible to a pullback should growth fail to materialize and/or borrowing costs ratchet higher.
That’s why we need to pay close attention to the Fed and try to avoid getting blinded by all the euphoria.
It won’t take much to send markets repricing fast.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
