While this isn't a textbook example of a H&S in terms of symmetry, failure to close above previous high would create a convincing example of a H&S.
With the most recent jobs report, the 25bps hike in May has become a stronger possibility. With CPI being released next Wednesday, this upcoming week could give a more positive indication on direction over the medium term.
Currently markets need to prove whether they are in a bear market rally or truly entering another bull phase. But the likelihood of the latter remains a lower probability in consideration of current economic conditions. While unemployment gives the indication of a strong economy, this is historically the last indicator to shift direction before recessions begin. Markets historically find their bottoms after rate hike cycles reverse, which usually aligns with the further deterioration of economic conditions.
Historically April is a good month for equities, which may continue to play out. Upcoming earnings will play a large role in the medium term outlook for equities. CPI is projected to drop to 5.2%, which even if this meets expectations is still a ways away from the feds 2% goal. This could indicate that the two scenarios ahead are that either credit tightens enough to work to bring inflation down further, which will cause more stress on the economy, corporate profits and consumers. Or this event doesn't have a substantial impact in which rates will need to stay elevated for a longer duration than the market is currently forecasting.
Either scenario carries a higher degree of risk to the down side for markets as the former makes a recession a higher probability and the latter would require markets to re-adjust forecasts.
The alternative is that inflation drops significantly below forecast, beating expectations and the fed may have a higher likelihood of pausing the hiking schedule in their May meeting. If this were to happen on the upcoming report, the challenge would then be to review future reports to see if this trend continues or if higher oil prices cause inflation to stick at a certain level. Which could then still require the same outcome of higher rates for longer.
The scenario where inflation keeps falling towards the feds target before the end of the year, credit does not continue to tighten and unemployment remains low as a result is the least likely scenario in my opinion. This is the most appropriate set of conditions that would be required for markets to continue higher.
The risk to the downside over the medium to long-term is greater in my opinion because of the implications of rising unemployment. If credit conditions tighten, money becomes harder to access and as a result unemployment rises, even if rates are cut as a result of these conditions, in this scenario inflation may still be elevated, and retail investors would need access to capital to cover job losses. This could weigh heavily on risk assets, equities and housing.
Its not out of the question that markets can continue to rise, it just appears to be the least likely scenario. For this reason I am positioned more defensively and will continue to sell into rallies. If these levels break and assets rally higher, there is enough volatility in the market to find a good entry should conditions offer more clarity or give better reasons to enter a long term position in equities.
With the most recent jobs report, the 25bps hike in May has become a stronger possibility. With CPI being released next Wednesday, this upcoming week could give a more positive indication on direction over the medium term.
Currently markets need to prove whether they are in a bear market rally or truly entering another bull phase. But the likelihood of the latter remains a lower probability in consideration of current economic conditions. While unemployment gives the indication of a strong economy, this is historically the last indicator to shift direction before recessions begin. Markets historically find their bottoms after rate hike cycles reverse, which usually aligns with the further deterioration of economic conditions.
Historically April is a good month for equities, which may continue to play out. Upcoming earnings will play a large role in the medium term outlook for equities. CPI is projected to drop to 5.2%, which even if this meets expectations is still a ways away from the feds 2% goal. This could indicate that the two scenarios ahead are that either credit tightens enough to work to bring inflation down further, which will cause more stress on the economy, corporate profits and consumers. Or this event doesn't have a substantial impact in which rates will need to stay elevated for a longer duration than the market is currently forecasting.
Either scenario carries a higher degree of risk to the down side for markets as the former makes a recession a higher probability and the latter would require markets to re-adjust forecasts.
The alternative is that inflation drops significantly below forecast, beating expectations and the fed may have a higher likelihood of pausing the hiking schedule in their May meeting. If this were to happen on the upcoming report, the challenge would then be to review future reports to see if this trend continues or if higher oil prices cause inflation to stick at a certain level. Which could then still require the same outcome of higher rates for longer.
The scenario where inflation keeps falling towards the feds target before the end of the year, credit does not continue to tighten and unemployment remains low as a result is the least likely scenario in my opinion. This is the most appropriate set of conditions that would be required for markets to continue higher.
The risk to the downside over the medium to long-term is greater in my opinion because of the implications of rising unemployment. If credit conditions tighten, money becomes harder to access and as a result unemployment rises, even if rates are cut as a result of these conditions, in this scenario inflation may still be elevated, and retail investors would need access to capital to cover job losses. This could weigh heavily on risk assets, equities and housing.
Its not out of the question that markets can continue to rise, it just appears to be the least likely scenario. For this reason I am positioned more defensively and will continue to sell into rallies. If these levels break and assets rally higher, there is enough volatility in the market to find a good entry should conditions offer more clarity or give better reasons to enter a long term position in equities.