This impressive climb has been fueled by an array of favorable macroeconomic factors, including subdued Treasury yields, diminishing inflation, and an overall economic slowdown in the United States following recent rate hikes — aligning with the Federal Reserve’s intentions.
The resultant optimism among investors has intensified, fostering a growing belief that the Fed may abstain from further rate increases, with speculations of a dovish pivot gaining traction for the coming year.
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Nevertheless, on Wall Street, the outlook for the current stock market rally remains divisive, with some foreseeing the S&P 500 soaring to 5,000 in 2024, while others anticipate a potential “rude awakening.”
Investors confident amid ‘soft landing’ narrative
Notably, Saxena said stocks are climbing on the “soft landing” narrative in spite of the Fed maintaining a tight policy, a significantly inverted yield curve, and quantitative tightening (QT), among other things.
“The Fed is tight, the yield curve has been inverted since Oct ’22, bank lending is contracting YoY, delinquencies are rising + QT is ongoing…yet stocks are rising on the “soft landing” narrative! “– Puru Saxena wrote in his post.
In turn, this suggests that the “credit cycle is dead” or “Mr.Market is about to get a rude awakening,” the popular trader added.
A “soft landing” in economic terms refers to a situation where the central bank successfully engineers a slowdown to prevent overheating without causing a recession.
In this context, Saxena is suggesting that despite various indicators signaling economic tightening, investors are overly confident that the Fed’s measures will lead to a controlled and gentle economic slowdown.
However, unless the current divergence indicates a break from traditional economic cycles, the market may soon face a significant downturn, he concluded.
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