Stocks Are at Record Highs, but Things Will Only Get Harder From Here - Kanebridge News
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Stocks Are at Record Highs, but Things Will Only Get Harder From Here

Expectations for interest-rate cuts are waning. Some investors say stock gains might be hard-won as a result.

By ERIC WALLERSTEIN
Mon, Jan 22, 2024 9:37amGrey Clock 3 min

Wall Street entered 2024 betting the year would go perfectly, but an up-and-down start for stocks and bonds suggests the going won’t be easy.

Stocks have climbed to records, driven by cooling inflation that has spurred investors to anticipate as many as six interest-rate cuts. Falling rates often boost share prices by reducing the relative appeal of bonds and making it cheaper for companies and consumers to borrow, lifting corporate profits.

But despite Friday’s record close in the S&P 500, the rally in major indexes has stalled in recent weeks—the benchmark index is up less than 2% from where it was a month ago—while the labour market and economy show few signs of slowing. Bond yields have ticked up in the new year after falling sharply at the end of 2023.

This dynamic is prompting some analysts and portfolio managers to warn that further stock gains might be halting because the rate cuts that are widely expected to power the market higher might not arrive as quickly as bullish investors had wagered.

“Clearly, the consensus is that inflation is under control and we’re heading for a soft landing,” said Doug Fincher, a portfolio manager at New York City-based hedge fund Ionic Capital Management. “It’s certainly possible—but a lot of that is priced in.”

The S&P 500 is up 1.5% this year, but analysts see more signs of caution under the hood.

Investors have retreated this year from shares of banks, smaller companies and real-estate firms that posted big gains during the fourth-quarter rally, which was kicked off by investor belief that the Federal Reserve had pivoted in November to a rate-cutting stance. Bond yields, which rise when prices fall, have climbed as traders have pared back bets that Fed officials will start cutting rates in March.

There is a greater than 50% chance the central bank keeps rates where they are at its March meeting, according to the CME FedWatch tool. At the start of the year, traders expected rates to end December around 3.85%. Now they expect closer to 4.1%, per futures contracts tied to the fed-funds rate.

Behind those moves: data showing persistent economic strength that could lift inflation. Treasury yields, a benchmark for borrowing costs, surged last week after Fed governor Christopher Waller cautioned against rushing to cut rates. Yields’ climb continued after data on retail sales, housing starts and unemployment filings all beat economists’ projections. The 10-year U.S. Treasury yield finished the week at 4.145% after starting the year at 3.860%.

Traders are now betting inflation will average above 2.4% over the next five years, the highest level since November, based on swap contracts tied to the consumer-price index.

The Russell 2000 index of small-cap stocks—which gained 22% in the last two months of the year—is down 4.1% in January. Speculative stocks have taken a beating; both Rivian and Coinbase have lost more than 25% after rising during the Fed-pivot rally. A KBW index of regional banks, which added 31% in November and December, has slid more than 3%. Shares of real-estate and utility companies are down even more, also having surged in those months.

The Bloomberg Barclays aggregate bond index, which soared in the final months of last year, is down 1.4% to start 2024.

“People tried to front-run the rate cuts by buying long-duration assets, like tech stocks and bonds,” said Nancy Davis, founder of asset management firm Quadratic Capital Management. “What if the Fed doesn’t cut that much or that quickly? Those people get hung out to dry.”

The Atlanta Fed’s GDPNow model shows the economy likely grew at a 2.4% inflation-adjusted pace in the fourth quarter. That is nowhere near the conditions that have historically necessitated rates coming down 1.5 percentage points—which traders were betting on heading into 2024.

The extra compensation investors receive for buying high-quality corporate bonds over Treasurys is slimmer than before the Fed began raising rates, now around a percentage point. Credit spreads on junk bonds are similarly tight, signaling little concern over company defaults. Leveraged loans—used to fund private-equity buyouts or finance poorly rated companies—are in such high demand that companies are slashing their borrowing costs.

Some investors believe a strong economy could still boost stocks.

Sophia Drossos, an economist and strategist at Stamford, Conn.-based hedge fund Point72, expects robust consumer spending—and a proactive Fed—to help avert a recession and prop up corporate profits. The strong underlying U.S. economy “means risky assets can benefit,” Drossos said.

Not everyone is optimistic. Some fear new sources of inflationary pressure, such as trade disruptions from the Houthi attacks in the Red Sea and a drought in the Panama Canal.

And technical factors also could undermine the market gains. Interest-rate bets often represent investors protecting their portfolios against the risk of a recession or crisis that requires sudden rate cuts. Without a major slowdown, investors might remove those hedges, raising market rates. That could tighten financial conditions and disrupt stocks without any fundamental changes to the economic outlook.

But considering the strength of the economy, many doubt rate cuts will be as aggressive as investors hoped just a few weeks ago, threatening one of the rally’s biggest pillars of support.

“You’d think the wheels would have to come off to see that number of cuts,” said Fincher.



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From Gucci to Valentino, designers have a new ethos: Fun

By JACOB GALLAGHER
Wed, Jun 19, 2024 3 min

Not long ago, designer Jonathan Anderson attended a music festival where he surveyed the crowd and thought, Now this is where all the fashion has been lurking.

“I saw more people dressing more in high fashion than actually what was happening in fashion,” said Anderson , who designs the British clothing brand JW Anderson, as well as LVMH’s Loewe.

The free expression of these festival goers stuck with Anderson as it clashed with the risk-shy attitude that has guided much of luxury fashion in recent years. “I wonder,” said Anderson this past weekend in Milan, “has fashion become so conservative whereas what’s happening out there is actually way more avant-garde?”

Just a couple of years ago in Milan, “quiet luxury” was on the tip of everyone’s tongue. This collocation was a simplistic shorthand for where fashion was going: pricey but prim; light on logos but heavy on the wallet; all cashmere everything in gray, beige, navy.

Fashion is a creative industry and designers can only cup their mouths for so long. At the latest edition of Milan men’s fashion week, shouts in the form of new, notice-me clothes broke out from the runways.

“People want uniqueness, maybe they want something which is challenging somehow,” said Anderson, speaking after the latest JW Anderson show, which was widely held up as the most successful collection of a muddled Milanese sprint.

Highlights included winsome cardigans with children’s book depictions of London terrace houses, leather jackets contorted by ski-slope-like hems and a kitschy sweater showing a smirking pint of Guinness—an upmarket riff on a Dublin tourist souvenir.

The day after Anderson’s show, came the surprise online release of a bulging 171-outfit lookbook from Valentino, the first stab from the label’s new creative director Alessandro Michele, who helped lift Gucci to a more than $10-billion brand before leaving in 2022.

At Gucci, Michele ushered in a maximalist fashion moment, and based on this initial showing, his taste for theatrics is intact. Against a backdrop of winter-mint curtains, feather-haired models (often wearing gigundo nerd glasses and hoops of pearls) sported floppy dog-ear ties, Kermit-green suits and tapestry prints. Flipping through the collection, all the tired but fitting Michele comparisons came rushing back: Wes Anderson films, kooky grandmothers and leopard-clad psych-rock bands.

Model on the runway at the Gucci fashion show during Milan Fashion Week Menswear Spring/Summer 2025 held at Triennale di Milano on June 17, 2024 in Milan, Italy. (Photo by Aitor Rosas Sune/WWD via Getty Images)

Valentino, which is part-owned by Kering, also made its commercial intentions clear by sending out 93 close-up photos spotlighting easy-to-buy accessories like V-logoed sandals and rectangular handbags.

Notably, Sabato de Sarno, the still newish creative director who replaced Michele at Gucci, seemed to be shrugging off his own restraints. Neither De Sarno nor François-Henri Pinault, CEO of Gucci parent company Kering, spoke to the press after the show, but the collection was a departure from the brand’s recent strategy of focusing on classic, trend-agnostic pieces that cater to older, wealthier clients.

De Sarno’s surf-inspired offering bounded between skin-revealing mesh polo shirts, skimpy thigh-high shorts and camp-collared shirts with blooming hibiscus flowers prints. It would be hard to imagine much of it on anyone over 29. (Actor Paul Mescal, 28, was already in the front row in a pair of those shorty shorts.)

Youthful abandon was the theme at Gucci’s mightiest Milanese competitor, Prada. “Sometimes when you get older you start to overthink a lot and you limit yourself,” said Raf Simons, who is co-creative of the brand with Miuccia Prada , the grand doyenne of Italian fashion. “When you are young, you just go. We like that spirit.”

Models wore navel-exposing shrunken sweaters and pre-wrinkled sportcoats, a seeming nod to teens who haven’t yet learned the wonders of ironing. A lurid palette of hot pink and electric blue spoke to juvenile fashion experimentation.

Throughout the long weekend in Milan, the feeling settled in that this new, shoutier tone was a necessary course correction during an unsteady period for the apparel industry, and really, Europe at large.

The chatter of the front row centred on this month’s European Union elections which saw a surge in support for right-wing candidates, catching pundits and leaders like French President Emmanuel Macron by surprise. Inflation also remains stubbornly high.

Pressingly, for the fashion world, some of the world’s largest luxury labels have been reporting a glut of unsold products and a dearth of shoppers. Past strategies don’t seem to be working and one could tell that brands were ready to try anything to spur shoppers to spend a bit more.

Even at Zegna, a label so synonymous with quiet luxury that the cast of “Succession” wore it on that money-mad show, the clothes were more conspicuous. In between its Learjet-bound sotto voce suits, one found vivacious coral patterned jackets in blue and yellow.

“For sure playing more with colors and prints, we had fun,” said Zegna’s artistic director Alessandro Sartori following his show. “It’s a sense of freedom that I wanted to express.”