After spending multiple decades in the markets, I’ve never seen such a broad and diverse range of economic data than now.
It’s a time of records and extremes.
On the one hand, there are a record number of new job openings. As Federal Reserve Chair Jerome Powell noted, the economy is still adding an average of around 408,000 jobs per month.
And this is all happening while the unemployment rate sits at 50-year lows.
Yet, against the backdrop of an almost nirvana job market, the economy is dealing with another extreme…
Inflation is running at 40-year highs and shows no signs of subsiding. If anything, the Consumer Price Index (CPI) data from June 10 shows inflation is accelerating.
So, with interest rates only just coming off record lows, on Wednesday the Fed announced a 0.75% rate hike – the biggest rate rise in 28 years.
Despite Powell’s effort in talking down a similar rate rise, we can just about lock in another 0.75% next month.
Even if the Fed decides not to go with 0.75%, we know we can expect a 0.5% hike at minimum – and many more rises after that.
This all adds to the uncertainty… and stock market losses.
However, many still don’t understand that shares are only one part of the equation. Rapidly rising rates are also playing havoc in the bond markets.
While pundits were debating bear market definitions as the S&P 500 teetered on a 20% pullback last week, the bond market was also facing a similar scenario.
The Bloomberg Global Aggregate Index has now also fallen by around 20% from its January peak in 2021. Bloomberg’s numbers show the sell-down has seen around $10 trillion wiped off global bond values in this year alone.
And that’s only the investment-grade bonds…
With increasingly stronger language from the Fed about the size and number of future rate rises, it’s hard to see how those losses won’t widen. Note that existing bond values fall, as rates rise.
Beyond that, the markets and risky assets in general are now going to deal with another major change…
The changing relationship between inflation and interest rates.
When inflation runs higher than interest rates (meaning a negative real rate) investors are happy to direct that “free money” into speculation.
If they don’t, they’ll go backwards as inflation erodes income.
That’s why we saw a boom in everything from cryptos and NFTs to artwork. Andy Warhol’s 1964 portrait of Marilyn Monroe sold last month for an American record of $195 million!
Even in tech stocks, we saw mega-high market caps despite some companies barely generating any revenue – let alone turning a profit.
However, as the negative real rate trade steadily reverses, all this unwinds.
Right now, bitcoin is struggling to stay above $20,000 – less than one-third of its all-time high.
And EV manufacturer, Rivian Automotive (RIVN) – a highly prized IPO just last year – is currently trading around 85% below its November 2021 high.
These are just two high-profile examples.
And that’s all before you consider how another round of interest rate rises are going to impact their values… and the rounds after that.
Clearly, the markets and alternative assets are getting a big dose of reality. Yet, despite the pain, we’re still in the early stages of this rate rising cycle.
As I’ve continually argued since this meltdown began, investors need to understand the game has changed. We must change how we go about our trading.
Meaning, we must remind ourselves each day to not try to pick the bottom…
Instead, we need to be steadfast in only looking for strong trade setups… and be ready to take our profits when we see them.
Editor, Trading With Larry Benedict
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