“My purpose is to make my narrative as truthful as possible.” -George Armstrong Custer

Nothing like a huge rally in a month’s time to make everyone stop talking about a recession.

Remember that December collapse? Felt like so long ago given just how violent the upswing has been since. The end of 2018 was dominated by prognosticators saying a recession was imminent, or already underway. Strangely enough, no one seems to be saying any of that now.

What changed? One thing and one thing only: price. At the end of the day, always remember that price dictates emotions, emotions dictate narrative and narrative results in poor decision making. Now I know that nearly everyone sees the unleashing of dovishness from Fed Chair “Papa” Powell as the reason for equities closing out the month of January so strong. But none of this should be a surprise whatsoever given just how severely flat the yield curve has gotten as the Fed has hiked short-term rates. Nor should it be a surprise whatsoever when inflation expectations have been in a solid downtrend since the middle of last year, largely due to Oil prices faltering.

The Fed likely won’t be raising rates this year unless inflation expectations rise, which I personally think will occur. What may be a source of increased reflationary behavior could be the U.S. Dollar itself, which seems to be rolling over technically. A weak dollar tends to be an inflationary force as exports rise.

(Click on image to enlarge)

This isn’t just a dollar story, however. Emerging markets and commodities more broadly look to be finally waking up after a horrible 2018. Higher highs seem to be the more likely direction in the near-term for all things ex-US.

(Click on image to enlarge)

What do you notice? Emerging markets bottomed in October. The US Dollar peaked in December. All before Papa Powell and the League of Extraordinary Bankers decided to hold off on further rate hikes and struck a more dovish tone. The seeds are already starting to sprout for a reflationary move higher led by cyclical global plays. For our ATAC strategies which heavily rely on leading indicators like Utilities and Treasuries, near-term on-going positive behavior remains intact (though always subject to change).

As a Portfolio Manager who has long waited for more normalized Intermarket relationships, more and more I feel the cycle changed last year. That’s a good thing. At least, that’s the narrative that keeps me excited.