Why I Have Turned Bearish On The Stock Markets
The US bond market rout has crossed the point where global markets can trust the Federal Reserve (FED) to step in – they are not giving in to the threat. So the markets have no choice but to cave in till the Fed does a pivot. In other words, world stock markets will keep falling till they see the whites of the FED eyes. They say December maybe. But by then, the markets will have puked 20 per cent down who knows (S&P from peak).
The FED is testing the market on its confidence in the FED. So this is now a big unknown and we cannot stand in front of a falling knife, rock, or whatever that is going to hit us on the head. So I have stepped out of the way till sanity returns. Even if the FED steps in sooner the point is we do not know and this market needs liquidity to feed on itself. End of story. I have turned bearish and reduced my midcap small cap risks to a minimum [whatever that number is, it is different for everyone], especially zero on newly listed stocks with little price history. Ideally, this is a normal correction to 18900-18400 and that is all it is about. Nobody gets hurt. But I always work with the worst in mind. If the knee-jerk reaction is bigger I should not get hurt so I am out of the way from that point of view.
In Jan the new low in Nasdaq was not confirmed by S&P so a bullish inter-market divergence developed. By then the bond market has also bounced back a bit so it looks like a good thing. But as markets slowly start rising in Jan then dip in Mar to the bottom the bond market does not do much. Stocks rise as bonds fall but nobody cares. The reason for all this is that from Oct to Jan central banks increased global liquidity. That elevated market conditions. The bond market decline was ignored till July of 2023. Now I made up a theory based on the 1980s that when inflation falls then bond yields also fall and the stock market goes up, thus bonds and stocks rise together. I have spent months seeing it play out. WPI inflation in India and PPI in the US hit zero recently but the FED does not seem to care. The bond market keeps falling. I think the Treasury needs to borrow all this money to fund the government so they cannot allow this to go on. That is true. But it is a question of timing. The FED is not changing its stance and now CPI has started to bounce back upward. So much for the inflation cycle saving the bond market. So my thesis goes for a toss because the FED decides when to lower rates and provide liquidity.
The US is the last man standing but now slowly slowing down with no signs of rates coming to the rescue. My last hope is government spending but at what interest rates? So this is where we are. The stock markets are giving up because of this uncertainty. They were sure the FED would save the Treasury, but they have decided that they will not do so today but maybe in the future at an unknown date. The net global liquidity has been falling for months now after the initial stimulus at the start of 2023 and that is now pulling down asset prices. Now only the Central banks of the world or government can stop the rout by stepping in because without liquidity the markets do not go anywhere. The free fall in the stock market will continue till the next global central bank intervention. Especially when the FED rescues the US bond market. When will they do that? Sometime after December 2023, it appears as of now but no promised date. We just have to wait it out.
The writer is one of India's veteran stock market analysts who has seen many cycles spanning over three decades. He is the founder of Strike Money Analytics and Indiacharts.
