There has been some good news to help markets move higher. Firstly, the banking flare up appears to be fading. Not implying banks are in the clear, but deposits are on the move in search of vehicles with more attractive yields or safer homes. This is negatively impacting some banks (regionals) and benefiting others (money center banks).
Just look at JP Morgan’s latest results, deposits up nicely. Or look at Blackrock that enjoyed strong inflows in Q1 to bond and money market investment vehicles.
Contagion or a systemic risk does not appear to be an issue.
Inflation has improved as well. This was the market’s biggest angst in 2022 so continued improvement is good news.
And while economic growth has been slowing, it has been gradual at this point. The growth has been just enough for bond yields to come down, but not too much to raise the market’s ire over recession risk.
10-year yields in the U.S. have now come down from almost 4.5% to 3.5% and in Canada from 3.5% to 3.0%. If you like the porridge analogy for the economy, the data is cool but not cold.
The recent high rally in the equity markets is fueled by multiple expansion, thanks to falling inflation and bond yields. However, falling inflation will prove to be a headwind for earnings going forward. And those lower bond yields — well they are lower because optimism for economic growth continues to dwindle, which is good for lower yields but not good for future earnings.
Final Thoughts
Future earnings are a bit “squishy”. And with the market enjoying the lift from bank fears cooling, inflation cooling and lower bond yields, could it keep going? Of course.
The recent market has been reacting to just about any news as good news: glass half full. And when the Fed finally announces the end of rate hikes, markets may rejoice. However, this advance is being built on a rather shaky foundation.
Don’t be afraid to take advantage of this recent bounce and continue pivoting to a defensive position. Or at least, be ready to do so in case the market switches to a glass half empty mindset.
— Craig Basinger is Chief Market Strategist at Purpose Investments
Source: Charts are sourced to Bloomberg L.P. and Purpose Investments Inc.
The contents of this publication were researched, written and produced by Purpose Investments Inc. and are used by Echelon Wealth Partners Inc. for information purposes only.
This report is authored by Craig Basinger, Chief Market Strategist, Purpose Investments Inc.
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