Aggressive neutrality continues to be appropriate, even as the S&P 'feels' heavier than might be expected, primarily because Oils have joined Banks on the weak side. For decades I've noted that you can't have reliable upside for stock Indexes, without Banks and Oils participating. It used to include Autos.

Freepik

All these are on their hind legs now, with Oils a bit weaker than we expected, while Banks have been warned about and avoided for some time. Autos are a special situation, because of the transition to EV's from ICE's. Challenges to maintain any kind of profit margin while this historic shift winds through loom. For that matter it's the reason I emphasized Silicon Carbide, primarily 'testing gear' from AEHR, but also limited positions in ON and WOLF, SiC leaders.

When you look at Volatility, we can see why perceptions of this as drawn-out over time, and we don't disagree. Hence the 'aggressive neutrality', which has approached individual stocks (active) versus Index focus (passive) investing, although none of it has been particularly exciting lately. However, as shifting of funds moves forward and eventually settles-down, one will get a better feel of which companies will do well, with a few failing and a couple excelling.

That latter part is tough because spending is contracting as nervousness has blossomed across the Land, primarily due to the perceived banking crisis. You even have a viewpoint that 'if' the Fed stops hiking then something is wrong. I hasten to emphasize something is wrong, but it's not new, and it relates very obviously to the failure of certain 'risk managers' at a few banks. But the mood becomes contagious, and that's part of the problem.

As 'Retail' numbers show consumer retrenching, there's a 'stall' in recovery prospects in many areas we have spoken about, including Autos, and even travel (hence concerned about Airlines, hotels and Cruise-lines, as these are generally priced too high for people. It is not to say people won't travel of course, but suggesting 'price wars' and competition coming very soon.

All that's a plus for travelers, won't restore business travel, but will be good for tourism. (I noticed American Airlines in-particular is abandoning 'business or corporate discounts' for all but the largest who spending over 1 mil yearly, that is a sign they are giving up on business recovery and trying to rely more on a resurgent leisure traveler, but much of that was post-pandemic 'release' travel and is calming down. The economic picture should impact that more, and that is why it presses profit margins, since business travel is more profitable. For that matter Delta, by comparison, still emphasizes that and is typically not a price-leader except where they have low-end competition, and makes primary profit not from flyers directly, but from selling miles to American Express.)

In-sum: 

Ruptures to the Banking System, here and/or in Europe, need to be contained so they don't crack more than the heads of hedgers and money managers trying to navigate the interest rate driven environment.

All this in any event suggests a hard landing or lending 'credit crunch' that persists. Again I believe the Fed should stop hiking and not worry about that inferring something wrong, since everyone knows there's something wrong. It's almost like the President mentioning 10 times in 2 minutes how safe and stable our banking system is, repetitive mentions increased apprehensions.

The banking system presumably 'is' safe, and this kind of market behavior is what happens when you are well along in the depth of a situation, or near the low point for stock indexes. The problem for S&P is that the year's of effective negative interest rates shifted funds from bonds / Treasuries into equity and to real estate, and they are out-of-whack with reality. Similarly many small stocks are overly suppressed, but those are often the ones that need available credit.

Uncertainty prevails, but this can be part of a structural low, even though we'd be pressed to argue any reason for S&P to advance a lot, although having a Fed that raised rates at an historic pace, they should proceed to 'help not hurt further' the Nation coming out of this.

Something broke, so they need to fix it. Even if we get a stagflation outcome. I concur that a prolonged inverted yield curve is unsustainable in this economy.

Investors are terrified by the two-year Yield, and implications. Yes slower for the economy, but also implies the Fed might need to respond to semi-panic in the rest of the world. A 'Credit Crunch' has unfolded of course, but lending or standards for lending have gradually firmed up for months. Maybe that's why the Fed lags so much, failing to recognize prior rate hikes caused havoc and a lot of damage that takes awhile to work its way through the system.

The Fed needs to stop. Full stop. I don't know if they will, but they should, as the backdrop for their posture has changed, and they need to be a bit flexible more so than they've shown before. It's all complicated, but the Fed pushed a bit too far and brought rates to the fore not by hiking, but by unwinding most of the structure which 'previously' had shifted assets into stocks, real estate, or other than Treasuries. What they've achieved however, broke 'something' obviously, and as I forewarned, harmed the very people they profess helping.

So the Banks are the 'pressure points' on both sides of the Atlantic. S&P went negative on the year, Oil broke both related to demand, and China-Iran-Saudi dealing (which everyone should keep an eye on as ironically it's disinflationary but increases geopolitical risks.. denoting my opining Saudi's as 'frenemies'.

The financial situation went to the 'counterparty' level, and therein likes risk as well. Yes the Oils & Banks became headline Index movers, but assurances as give some comfort to business and consumer banking are undermined if this is allowed to go further. So everyone can debate whether unlimited protection of deposits isn't 'the American way', but avoiding systemic fiasco matters too.

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