Are You Seeing Euphoria Anywhere?

1.) POSITIONING – When it comes to investing, the most important thing to understand about a stock, an event, or the entire market is positioning. Where are all the players already positioned? This does not mean an event isn’t real. It doesn’t mean the macro situation isn’t bad or that the war with Iran isn’t dangerous. It means markets do not move based only on whether the news is good or bad. Markets move based on whether there are still buyers or sellers left to act on that news. We saw it at peak fear during the war with Iran. We saw it during the financial crisis. And we see it every day in individual stocks. But you don’t even have to go that deep. Look at the current obsession with a -10% market pullback. Everyone keeps repeating that every midterm-election year had a -10% drop. That fear has already pushed hedge-fund exposure to extremely low levels, something I’ve written about recently. That positioning is more important than the prediction itself. If positioning is already extremely bearish, much of the fear is already reflected in the market. This does not mean the market can't fall another -2%, -3%, or -4%. It means many potential sellers have already sold and the supply of new sellers is becoming exhausted. At the end of the day, markets fall because people sell and rise because people buy. If almost everyone who wanted to sell has already sold, even terrible news may struggle to push the market much lower. You need new sellers, not another person on television repeating the same bearish argument. The entire market cycle can be explained through positioning:

• 𝗕𝘂𝗹𝗹 𝗺𝗮𝗿𝗸𝗲𝘁𝘀 𝗮𝗿𝗲 𝗯𝗼𝗿𝗻 𝗶𝗻 pessimism, when almost everyone has already sold.

• 𝗧𝗵𝗲𝘆 𝗴𝗿𝗼𝘄 𝗼𝗻 skepticism, as cautious investors slowly begin buying.

• 𝗧𝗵𝗲𝘆 𝗺𝗮𝘁𝘂𝗿𝗲 𝗼𝗻 optimism, when the majority is already invested.

• 𝗔𝗻𝗱 𝘁𝗵𝗲𝘆 𝗱𝗶𝗲 𝗶𝗻 Euphoria, when everyone is positioned max long and there is nobody left to buy.

You tell me…do you see euphoric investors or, for that matter, anyone euphoric about how wonderful everything is? I don’t.

2.) RATES – There’s a lot of talk about interest rates right now. Yes, interest rates across the yield curve have been rising. But it isn’t isolated to just America. In the chart below, every line represents the 30-year government bond yield for a different country. These countries have different presidents, different central banks, different budgets, and different economies. So what does the bond market know? Well, interest rates are basically the price of money. So when the price of money is rising all over the world at the same time, I’m interested. At the same time, we just got another month of data, and stocks aren’t just moving up in the U.S. We’re seeing markets moving higher throughout Europe and Asia, too. If U.S. interest rates were exploding higher while rates everywhere else were falling, that would tell us something very important about America…and everywhere else too! At the end of the day, rising rates are simply the bond market saying we see inflation, not recession. And inflation combined with growth is not a bad investment environment.

3.) GROWTH – I’ve commented frequently about how markets don’t just consider a “number” for growth and inflation, but whether or not they are accelerating or decelerating. If we get accelerating growth, it’s not uncommon to have accelerating inflation. So when rates are rising, people will often confuse the rise of those interest rates as an inflation-only story, when oftentimes it is a reflection of growth as well. The chart below shows that current GDP estimates continue to accelerate. Investment markets tend to do okay within the framework of accelerating growth and inflation. The Atlanta Fed recently updated their GDP estimates, and as you can see below, the lines are moving higher. Their Q3 real GDP tracker ticked up to +4.82% as of September 1st, the highest since August 6th and up from +4.61% on August 26th (last Wednesday). That might be a relatively modest move, but that increase masked the bigger moves in individual components. We’re seeing gains in the contributions from business spending (to +1.63% from +0.91%), inventories (to +2.08% from +1.71%), and consumption (to +2.37% from +2.10%) more than offsetting a sharp deterioration in net exports (to -1.34% from -0.14%). So far, that data appears to support what the bond market is saying.