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Inside Markets — Market Narrative

Market Narrative

October 9, 2024

The market narrative leading into last Friday’s Jobs Report was centered around disinflationary rate cuts and eventual pro-cyclical equity leadership. This narrative assumes the Fed will try to take the funds rate to ‘neutral,’ which you can pencil in at 3%. We use cross market price action to confirm the validity of market narratives or themes. The ‘disinflationary rate cuts and cyclical leadership’ narrative has been the predominant theme since July but it remains unconfirmed in markets. Cyclical recoveries are usually preceded by outperformance in the Russell 2000 (RTY) and coincident strength in copper prices. In our view, a new cycle high in the RTY (sustained levels above 2264) and corresponding strength in copper would confirm the narrative and motivate us to add more cyclical equity exposure. A near-term confirmation of the ‘disinflationary rate cut’ theme is still in play, but a competing ‘higher for longer’ narrative has reemerged in the wake of Friday’s stronger-than-expected payroll data. The higher for longer narrative (fewer Fed rate cuts) was the predominant theme leading into July with secular growth stocks (large cap Tech) as the primary beneficiary.

We keep a near-term bullish bias as long as the SPX can maintain levels north of ~5540. A volatility spike remains our primary concern with VIX levels >22 creating a headwind for rally attempts. The VIX currently sits at 21. Elevated equity volatility usually starts in the bond market but it can come from any number of sources. John Templeton usually gets credit for the adage that a ‘bull market must climb a wall of worry’ and there doesn’t seem to be any shortage of worries at the moment.

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