(Divergence of confidence)
Earlier this year for many months the market saw interest rate inflect when the shorter-term treasuries paid a higher rate of interest than the 10-year treasury. This has been a leading indicator of a recession. Since then it has been widely debated on if the U.S. economy is headed into a recession or not. A response from the Federal Reserve was warranted with three interest rate reductions. Federal Chairman Powell stated that this was mid-cycle adjustment needed to support momentum in the market. Leading Economic Indicators (LEI’s) show the U.S. economy has slowed since the beginning of the year. What hasn’t slowed is the labor market which continues to tighten. It should be noted though that the unit labor cost has peaked recently signaling higher labor costs, lower productivity and declining profit margins. A positive thought was a higher than expected GDP report last month. Expectations were at 1.5% and it actually beat coming in at 1.9%.
Wait and see is where most money managers and economists are at. Even Chairman Powell expressed there would be no more rate increases in a hawkish statement. Is this enough to avoid a recession, increase inflation and continue the bull run. The GDP reports seems to indicate but the labor market seems to be signaling a slowdown. Many eyes are waiting for new economic reports to show an improvement or a further erosion.
New records are being made as major indices have made new highs. November and December are typically some of the best months in the year for the market. With a Phase I trade agreement on the table it seems the market will be full of profits this year. I am still very cautious. I don’t like the inflection earlier this year, the decreasing leading economic indicators and the Fed’s confidence they needed to lower rates as a stimulus measure. Let’s face it, that what it is, stimulus.
Currently, there is a surge in confidence and optimism in the market. This is measured by Sentiment Trader’s “Smart Money and Dumb Money Confidence.” Smart Money is made up of insiders from institutional and professional investors, where Dumb Money small odd lot investors and traders. This tracks the behavioral measures. As you can see in the chart, “Dumb Money” confidence has surged where as the “Smart Money” identifies extreme optimism and sniffs a subsequent market pullback. The “Smart Money” and the “Dumb Money” have diverged again.
Whenever you see this overly optimistic feeling with small investors and blatantly negative feelings by money managers it is another sign to be patient and cautious.
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Andrew F. Kotyuk, CIMA* is CEO and Principal of Alpha Wealth Management LLC
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