We closed out last week with the S&P 500 hitting all-time highs, an unambiguously positive milestone. Yet the celebratory mood at Fundstrat was somewhat muted this week. Head of Research Tom Lee argued that “the easy money has been made for now.” As he has previously written, the beginning of January tends to foreshadow how the full year will play out, and in his view, the “sloppy trading” we have seen thus far “is a reminder to expect a challenging year.” He said, “We are now overbought […] so this is not a full ‘risk-on’ market.”
“It’s true that the indices have been holding up – the S&P has been somewhat flat year to date and the Nasdaq is up almost 1%,” he acknowledged. “However, those owning individual stocks might have noticed a lot more tumult and turmoil,” he said.
Or, as Head of Technical Strategy Mark Newton put it, “Technology, the trickster, has been at work again, making the U.S. Equity market seem flat,” he said. “When excluding Technology, this year has actually gotten off to a rough start and most sectors are down, despite what the indices seem to suggest."
One of the things contributing to volatility this week was uncertainty over the Fed’s timeline for rate cuts. Various Federal Reserve officials publicly suggested that March could be too soon to begin cutting. “Fed officials simply are not convinced inflation is falling fast enough to warrant cuts,” Lee said – a view that diverges from what his research shows.
Our view remains that inflation is falling faster than many realize. And at the core is that housing and autos remain the primary driver of inflation. "Auto insurance actually accounted for nearly half of the rise in core CPI and core services inflation these past few months," Lee pointed out. This leads to two questions:
- Does tight monetary policy stop auto insurance rates from rising?
- Is the Fed aware of the outsized impact of auto insurance?
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