We Might See A Year End Rally In Equities

Cathy Wood and Ark Investments are loading up on Tesla. Reports are that all three of the Ark funds added the leading EV maker's stock.

Granted this might not be the best indiciator of the direction of the market. What it does signal is that people are buying.

Ray Dalio is on record as saying he is out of money. If he had more, he would be buying right now. He is very optimistic about the equities market at these levels.

This is contrary to what the mainstream media wants to espouse. They love to spread the fear. After all, with Russia, a recession, cryptocurrency, and inflation, how can anything good happen? Here is where the media lives.

The reality is we are seeing a lot of pessimism. This is important because it is during the most pessimistic times that turnarounds happen. Markets never bottom when people expect them.

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Year End Rally

Most are not prepared if a rally into year end takes place. The sentiment has forced a lot of people out of the market. Does this mean we are ready for a massive bull? That idea might be a bit premature. Nevertheless, the risk on trade might be getting closer.

There is little doubt 2022 was a rough year. Many are looking for it to end. That said, on the grant scheme, we could be primed for things to turn around, at least in the near term.

With so much negativity, smart money tends to go in the opposite direction. The worst time to buy is when every talking head on television is screaming how hot the market is. When they are telling everyone all that is wrong, perhaps the bottom is in.

Markets are irrational. That is why trying to apply logic is useless. You can mention 10 reasons why the market should not go up and I would probably agree with you. However, there is only one that matters: capital flow.

If money is going to flow into the market, especially US equities, that is all that is required. All the reasoning in the world will not offset that. When money managers decide it is time to take a bite, things can take off.

We might be at that point.

Inflation

The top story of 2022, as it pertains to markets, is inflation. This is the big elephant so we have to keep an eye on that.

As this is written we are basking in a better-than-expected CPI report. This caught the market off guard since the inclination is that prices will continue higher forever. After all, the gold bugs tell us hyperinflation is always on its way. When it doesn't arrive, it is because the CPI is manipulated and nothing but a lie (notice how they didn't claim that the last 18 months).

The reality is that supply chain disruption is what caused the issue globally. Since there is some easing on that front, it only makes sense that we see things pulling back. We also have the Fed pushing its tightening, which is having an impact upon demand. This hastens the supply chain resolution since less is required.

What is left is layoffs. The other end of the Phillip's Curve is the employment situation. The Fed keeps telling us how robust the job market is.

Sadly, this is not going to carry on much longer. There are two aspects to this to be mindful of.

The first is the fact that a lot of the most recent jobs were part time. This is commonplace. Companies tend to hold onto staff, moving them to part time so they can easily increase the hours if business picks up. The latter is not likely to happen.

A second piece enters when looking at the market. Many feel that job cuts are bad for the economy and that is certainly true. Where they are of benefit is to companies. When profit margins shrink, and earnings head down, the easiest way to adjust that is to lay off workers. This has an immediate impact upon the income statement, helping to push earnings the ensuing quarter.

As companies lay off more people, their expenses drop a great deal. This is where the offset in business loss enters. Even though they might have less revenues, profitability is maintained as the per unit improves. Excess employees, which is commonplace during bull markets, tend to be a massive drain.

All of this could play into a year end rally.

This is for information purposes only and is not to be taken as financial advice.

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