Market Magic: Gold Soars, Stocks Surge in Surprising Goldilocks Rally!
Abraham George Market Musings
It’s very rare to have a Goldilocks situation like what we're currently experiencing. Bonds are rallying, gold is close to an all-time high, the Nasdaq is almost touching its previous highs, the Dow isn't far off, and the S&P 500 is just 200 points short. It's uncommon to see gold and equities rising simultaneously. Gold has already risen 14% this year and has significant potential once it clearly surpasses its all-time high.
The Fed's most favored inflation figures came in as expected or slightly lower, but Powell continues to threaten further tightening if necessary. He has to maintain that rhetoric. He did it when rates were zero, and now he's doing the opposite as rates peak. The last Fed tightening was in July, and I've argued all along that the Fed tightened more than necessary. They tend to overshoot in their policy decisions, being very dependent on backward-looking data. Powell aims for a 'Hudson River’ style landing, but he'll unlikely achieve it. Perhaps the adoption of blockchain and AI will lead to significant changes, but that's still in the future.
With the third-quarter GDP at 5.2%, we've seen the peak in GDP growth for this cycle. The economy may be entering a recession or might already be in one, but this shouldn't deter the equity markets from climbing further.
It all started with the interest rate markets. First, we saw a turnaround in the 2-year Treasury yield, then the 10-year, followed by major corporate bond and Treasury bond ETFs. The 10-year yield has dropped by 80 basis points in a month, which is significant. But there's more to this movement.
On the equities front, we could be witnessing a rotation. The 'Magnificent 7' has collectively risen by more than 80% this year, driven by generative AI. While there's considerable potential for the sector moving forward, there are signs of topping out at current levels. Regulatory uncertainties related to AI could be a factor. There might be a shift from tech to value and small-cap stocks. The Russell 2000 looks more attractive. Typically, small caps and emerging markets outperform significantly in December.
Many investors are still in a 'wait and see' mode. With ample cash in money market funds and interest rates poised to move lower, I anticipate an explosive upside move in equities. Any weakness should be limited to 5 to 8%, but the potential for much higher levels in the next four months is greater.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.