Stocks’ mysterious strength should not stop investors acting

The way US stocks have navigated the current phase of macroeconomic and interest rate volatility reminds me of the recurrent “mystery” line inExplaining his business to a financial backer, the head of a theatre group notes that “the natural condition is one of insurmountable obstacles on the road to imminent disaster”. When asked, “so, what do we do?” he responds: “Nothing. Strangely enough. It all turns out well.” And when pressed how, he says: “I don’t know, it’s a mystery.

Solid job creation, low unemployment and 11.3 million job vacancies underpin a strong labour market. You can add to that the probability of higher wage growth and the possibility of greater labour force participation over time.This is reinforced by the fact that, for all the talk about tighter financial conditions, the US reality has been much less dramatic. Goldman Sachs’ widely followed financial conditions index has risen in the past few weeks to just slightly above its all-time low.

Yet, these explanations fail to fully solve the mystery. There is also an element of “it all turns out well”., quite a few people are hoping for an immaculate disinflation — when, through a mix of luck and skill, the Fed is able both to materially contain inflationary expectations and avoid a recession for an economy that is already dealing with a contraction in fiscal stimulus, stagflationary winds and declining saving balances.

If stocks’ resilience continues, investors will benefit from the part of their portfolio that remains fully invested. If the resilience is challenged, which I suspect is likely in the weeks ahead, they will have the opportunity to reload at cheaper prices.

Says the shorters lol

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