Fastest Stock Market Rally In 90 Years

Fed Projection

We think the focus on potential rate hikes and higher yields are coming to a forefront because of the speculation in some risky stocks. When those risky stocks fall, the higher 10 year yield is blamed. Of course, investors also fear rate hikes. A higher discount rate and a higher Fed funds rate are bearish for risky assets. At the same time, they are so far from reality, few growth stock DCF models have been taken seriously for months.

As we mentioned, the Fed is definitely not raising rates this year. The chart above shows the market agrees. The latest vaccine and inflation optimism have pushed the market to price in a rate hike in 2023. That’s very reasonable because the economic recovery will be swift. The Fed probably won’t talk about tighter policy at its Jackson Hole meeting this year, but rate hikes will probably be mentioned by the Fed next year. There is no question any high inflation readings are going to catalyze calls for rate hikes, but the Fed will call this price pressure transient which will be partially correct.

Bridgewater Checklist

Bridgewater’s aggregate bubble gauge is in the 71st percentile. The table below shows the qualifications. It’s important to note that there was a bubble in 2007, but it was in housing, not stocks. In this case, we have a moderately expensive overall market with pockets of bubbles. The total market is in the somewhat frothy range, while the emerging tech group is in a clear bubble. The bubble clarification given by Bridgewater on emerging tech probably isn’t bearish enough. When it ends, there will be many pain points. It won’t be a simple 10% correction or an elongated period with little movement.

Source: Ray Dalio

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