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Rally, Revisited

On the back of a weak jobs report on Friday, we had one of the biggest everything rally in a while. Equities surged, with the S&P500 now just 5% shy off the highs we made in August. Rates also came lower, even at the long end and the higher for longer narrative is beginning to fade. The dollar weakened, commodities strengthened, and even the froth, otherwise known as the regional banking index (KRE), is now up some 20% from the lows. The question is, where do we go from here?

The jury on inflation is still out and one report suggesting that businesses are hiring less will not solve the problem. Nonetheless, leading indicators have signalled a weak economy for a while and if the labour markets have finally cracked, central banks may finally stop with the hurt. We can also take solace in the consumer running out of money. Excess savings from our times in lockdown are gone, credit card debt is at an all-time high, and the cost-of-living crisis is continuing to do serious damage to our discretionary spending.

Unsurprisingly, sentiment has been extremely bad, which has meant that investors were mostly positioned to the downside. As such, we can think of the short covering that is fuelling the rally as an early Christmas gift. Great, what could possibly go wrong? Well, we are still in the middle of earnings season. That’s a bit like waiting for the bill after having had a lavish meal with all the trimmings. With highly optimistic analyst expectations, it might be worth surveying the damage before going all in.


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