In NYC, you keep walking. Don’t make eye contact, watch where you are walking — and just keep going. But if you ever lived here for any amount of time, you know there is another side to it. New Yorkers also help when something is needed. Unsolicited, they will let you know you dropped something or warn you if they hear you talking about the wrong direction on the subway.

So, recently I learned how I hadn’t been so balanced in what I taught my own kids. I was getting them to school on the subway. We could see our train coming down the tracks and, as usual, we had just enough time to get to school. But I also saw an older man with a walker. He was looking down at the steps to the train, figuring out how to get down them, along with his walker (and ugh for no elevators at our stop!). 

I offered to bring the walker down the stairs and both of my kids looked very concerned that this would slow us down, and we’d miss the train. So I said, “We’ll make it, but sometimes there are more important things than just running through life.” 

Now I don’t know if my sub-10-year-olds understood that at all, but they watched me bring that walker down, while the guy was slowly walking down the stairs, and we hopped on the train just in time. 

I’ve thought about this in investing, too. Sometimes there are more important things than to just keep moving — than to just react to every short-term trend. Asking yourself, can I slow down to assess the importance of a new situation on my plan, or do I take it at face value and react? 

Last week, the Nasdaq reached a bull market (defined as +20%) from its low on December 28, 2022. The bulk of this recent move kicked off after March 8, which was an inflection point for a lot of data and the start of the banking sector's issues. Is the bull market a short-term trend to react to, or something to just slow down and notice?

Well, the appreciation of the Nasdaq Index was mostly due to eight stocks (Apple, Microsoft, Nvidia, Tesla, Meta, Amazon, Google and AMD). Here are the numbers:

Not exactly healthy, if breadth is a measure of it. Looking at this another way, when the Nasdaq 100 Index reached bull status at +20.5%, the equal-weighted version of it was up 7% less, at +13.5%, over the same period. 

What I think:

• The lack of breadth leads me to believe this may be more a short-term trend rather than a sustainable investment idea. 

• Moreover, this feels like a reaction to the stresses in the banking sector, which started around March 8. On the surface, the top eight movers in the Nasdaq — all in the tech sector — are as far away from regional banks as you can get in the stock market. 

Lastly, if you’ve been reading my posts, you know interest rates and expectations of them have a meaningful impact on the markets.

With that in mind, this picture of the 10-year Treasury yield and Nasdaq Index sure says a lot:

The path of the Nasdaq (and the S&P 500) is a mirror image of the path of the 10-year Treasury yield. And interest rates started falling around March 8. They are currently around 3.5% — where we expected them to average for the year. 

And in light of the banking stresses, we’ve seen two shifts which started right after March 8, that, on the surface, look like the market dynamics of the stimulus/QE era (which tech did very well in)… but are for sure not.

1. The Fed has increased its balance sheet:

   

   Of course, this time the reason for the expansion, and where the funds are going is very different — lent to banks where capital is needed, rather than being used to buy bonds and push interest rates down (QE).

2. The market thinks rates are going down again (even though the Fed said that was unlikely this year):

   

   For context, the current effective Fed Funds Rate is 4.85%. You can see on March 8, the market expected further increases, ending the year around 5.6%. Today, it expects the Fed to end the year with their rate around 4.3%.

So with all this said, will the bull market in the Nasdaq continue? 

I don’t think it will. The banking crisis will likely tighten credit conditions (meaning less lending, leading to less economic activity), pushing us closer to broader recessionary conditions. Meanwhile, inflation is still on the mind of the Fed, which means the aforementioned gap between market expectations of interest rates (to fall) and future Fed action is real (they say they will rise). At some point, the gap must narrow and my view is that it will be the market that moves, not the Fed. The market will eventually reduce their expectations of interest rate cuts. This is further underlined by OPEC+ deciding to cut production this past Sunday. All else being equal, a production cut means oil prices are likely to be higher, contributing to inflation. 

While I am fully aware that a slowing economy should naturally bring down inflation and interest rates, I believe there will be an intermediate scenario like the above before we get there. 

The risks to my view include the resilience of corporate earnings (cost cutting has been leaving earnings in an ok place) and general investor sentiment. On the latter, multiple surveys and data points have been published highlighting investor skepticism of the markets — with higher cash holdings and lower equity holdings than historically seen, on average.

We’ll get more data from the next employment report on April 7, inflation report on April 12, and the start of Q1 '23 earnings season around April 14 (with the banks). 

This should all bring more clarity — and tell us whether or not this market will keep moving up or start slowing down.