This is a sentiment rally

With the Nasdaq 100 up over 20% on the year, the only question you should be asking yourself is, why? What is the market pricing in?

Most of the time when I am thinking about intermediate risk and where it lies I am thinking about what the market has priced in and why it might be wrong.

There isn’t a better example than what we are living in right now.

It is so obvious that the market is pricing in a pivot by the Fed and a pivot in rates and the cost of capital. When rates/the cost of capital fall(s) prices go up. You can see that in both stocks and bonds (cost of capital is a equation that include risk free interest rates).

The 10 year treasury was down to 3.3% from a 4.25% peak… which ultimately meant that the cost of capital inside businesses was lower.

That pricing was on a future expectation that the Fed will lower rates in the near future. That is not a set in stone future, so the market is pricing a probable possibility that something will occur. What happens if it doesn’t occur? What happens if it does occur?

Right now the Fed is adamant that they will hold rates high through this year and into next year before slightly cutting rates. They, of course, have backtracks on similar statements in the past before, but the fact still remains that they haven’t set anything in stone like the market has.

If rates come down like the market expects, I don’t see materially strong price increases on stocks or bonds, because it is already priced in by the market. However if rates stay high contrary to market expectations I feel like the stock and bond market will lose some steam and come down, but maybe not to new lows.

This is the definition of a sentiment driven rally. The market is dead set on a probability and assets being are priced accordingly, as if it were fact. The risk is that the probability doesn’t come to fruition.

Even in my personal portfolio I have been allocating my savings into bonds and cash, since rates are still high, waiting for the event to occur in either direction to give me some confidence of the path ahead.

Anyways those are my thoughts on new money positioning, here’s everything I read and wrote this week.

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