Saturday, 27 April 2024

By Murray Dawes Editor, Retirement Trader and Fat Tail Microcaps

[2 min read]

Dear Reader,

After a strong finish to last year in the ASX 200, 2024 started off on the right foot with a breakout above the previous all-time high hit in August 2021.

US stocks were powering ahead day after day and the Aussie market went along for the ride, with small caps also coming back to life after a couple of horrible years.

It may surprise you to know that the ASX 200 is currently trading at 7,590, which is exactly the same level it closed at on the final trading day of 2023.

In other words, the last four months trading has gone nowhere fast.

The reversal of fortunes in the bond market is the culprit, with the goldilocks scenario of falling inflation and interest rates combined with resilient growth starting to look like wishful thinking.

I have been alerting you to the weakness in US bonds for a while, preparing you for the possibility that stocks would soon encounter selling pressure if rates kept rising.

US GDP figures released on Thursday showed growth slowing rapidly and inflation remaining elevated.

GDP for the first quarter came in at 1.6% which was well below expectations of 2.5% growth. The Core PCE deflator (one of the Feds preferred measures of inflation) hit 3.70%, well above expectations of 3.40%.

Slowing growth and rising inflation is never what you want to see.

In response, US 2-year bond yields closed above 5% for the first time since November 2023 and US 10-year bond yields headed above 4.70%.

US stocks were weak for most of the day but turned higher on the back of solid results from Alphabet (Google) [NASDAQ:GOOGL].

With only a few days left in April, it looks like we will see a monthly sell signal in US 10-year bonds confirmed. The long-term trend in yields remains up, so investors should be aware that further weakness in bonds should be expected.

Greg Canavan and I have already taken evasive action, exiting interest rate sensitive stocks in our services over the past few weeks.

As I show you in the Closing Bell video above, the long-term trend in US and Australian stocks remains up, but weekly momentum has turned negative.

It is a situation that calls for some caution, but certainly no need to panic. Investors who have enjoyed the run over the past six months may consider taking a bit of money off the table, but positioning should remain long until further proof of a larger correction is confirmed.

In today’s Closing Bell, I look at previous economic cycles and the path of two year interest rates so you can understand the current state of play.

Regards,

Murray Dawes,
Editor, Retirement Trader and Fat Tail Microcaps

Murray Dawes is our resident expert trader and portfolio manager. He is a former Sydney Futures Exchange floor trader who went on to design custom trading systems and strategies for ultra-wealthy clients (including one of Australia’s richest families). Today, his mission is to help ordinary Aussie investors make profitable investments, while expertly managing risk.

He uses his proprietary system for his more conversative and longer-term-focused service Retirement Trader…and then applies the same system to the ultra-speculative end of the Australian market in Fat Tail Microcaps (this service is strictly limited and via invitation only).