Market Musings 230825: Breakouts galore!
As the summer holidays draw to a close for me this year (back to work on Monday), August (so far) has been a surprisingly strong month for global stocks and certain commodities. A word of caution, however. September is seasonally the weakest month of the year for stocks, so a correction may be close at hand.
Jerome Powell at the Fed delivers a dovish surprise
The one notable conclusion to draw from Chairman Powell’s speech at the Fed’s annual get-together of central bankers at Jackson Hole, Wyoming this year was a downplaying of the Fed’s 2% inflation target in favour of supporting full employment in the US economy.
This suggests that the Fed is leaning towards President Trump’s desire for lower US interest rates (the Fed Funds rate) to boost US growth. One might also conclude that US inflation may continue to run at well above 2% for the foreseeable future. After all, US CPI has already run consistently above 2% for the last 52 months in a row (over 4 years).
In my view, this favours investment in real assets that can hedge against inflation, such as real estate, inflation-linked bonds, infrastructure assets and commodities.
But is a growth bubble forming in US stocks?
The famed investor Howard Marks (founder of investment firm Oaktree) has warned this week of a bubble brewing in US stocks. This is evident in the investor euphoria over a number of growth-related investment themes dominating the US stock market at present, including of course Artificial Intelligence, quantum computing, SPACS (Special Purpose Acquisition Vehicles), small modular reactors in nuclear power, cryptocurrency treasury stocks such as Strategy, amongst others.
US stock valuations for the largest companies are very high compared to history, while US retail investors have taken on more margin debt to buy stocks than ever before. In addition, retail investor buying of zero-day (ultra short-term) options and leveraged ETFs has exploded as investors look for ways to leverage up their gains in the current bull market. Moreover, in aggregate US households are now more exposed to stocks in their net financial worth than ever before, at 44% of their total net financial assets.
Since April, US stocks have enjoyed a huge comeback following Trump’s Liberation Day tariff shock, up 30%…
