Less than a week into the year and it's already getting excited, with yields and the dollar surging, while stocks are sliding to the worst start for a new year since 2008; here, courtesy of BofA's flow show it the YTD performance summary: US dollar 1.1%, oil 0.8%, crypto 0.5%, commodities 0.0%, cash 0.0%, HY bonds -1.0%, gold -1.1% , IG bonds -1.2%, gov bonds -1.4%, stocks -1.7% YTD.
Of course, this is just a snapshot of the beginning: where stocks will be in a month, and certainly a year, is anyone's guess, but mostly the Fed's: as BofA CIO Michael Hartnett writes in his latest Flow Show note, Fed and yields are dictating credit and stocks: lower inflation, lower rates = +ve risk assets, but higher unemployment, lower rates = -ve; And in a moment of surprising lucidity, Hartnett points out what we have been saying for a while (see "Why The 'Most Consensus Trade' Of 2024 Will Blow Up In The Market's Face") namely that given the upcoming surge in bond supply to refinance govt and corp sectors (UST $1.8tn in '23, US IG $0.8tn, 10% US HY and loans mature next 2 years), it is "critical Fed eases H1 to avert corporates cutting jobs and capex H2." In other words, the Fed better defeat inflation now, and better pray that China doesn't unleash a massive fiscal stimulus that will send commodities to the moon and blow up the Fed's and the White House's carefully laid plans.
And while the Fed and yields are certainly the two most important independent variables for capital markets in 2024, the only three dependent things that matter for asset prices are Hartnett's favorite 3P's: Positioning and new information/events that change expectations of corporate earnings (Profits) & interest rates (Policy).
