April 14, 2023
We’ve been saying for several weeks that strong technical resistance in the mid-4100s should cap the S&P 500 (SPX) until there’s a change in macro fundamentals. Bull markets lead a cyclical recovery, but a cyclical recovery isn’t possible when all segments of the yield curve are inverted and money supply is contracting. Signs of accelerating disinflation in the March CPI and PPI reports earlier this week took our market-based indicators to encouraging but inconclusive levels. The 5/10 yield curve inversion has bottomed, but has yet to signal an imminent Fed pivot. Nominal bond yields and real yields peaked in early March, but haven’t yet reached levels that would confirm a longer-term trend reversal. A positively-sloped 5/10 yield curve would signal an imminent Fed pivot and encourage us to add equity exposure. Ten-year nominal yields below 3.20% would confirm a top in yields, and sustained 10-year real yields below +108bp would confirm a lasting rotation into Tech. The Nasdaq 100 (NDX) remains the most technically attractive major US equity index and Russell 2000 (RTY) is the least attractive. Small cap companies that make up the RTY have more floating rate debt and are more sensitive to rising labor costs than large cap companies. We maintain a tactically bearish outlook overall, but look forward to bullish inflection in the coming months.