CIO Insights: Resolving the Dichotomy

The breakout into new highs is challenging bearish narratives, including our own biases. More importantly, price action is dichotomous with an economy that has shown clear signs of a slowdown. Can economic fundamentals turnaround enough to justify market signals or is it a false breakout? Using price action as the starting point detaches from anchoring behavior and for now, the trend and the breakout favor the bulls. Sustaining the breakout post FOMC and triple witching will be critical - at the minimum, the dichotomy will likely persist. Optimistically, even if low probability, macro data will reverse its downdraft.

In either case, long term investors should have a core allocation to the AI ecosystem equities. Based on price signals, our equities portfolio is currently unhedged.

Away from equities, Gold remains the preferred currency play while in fixed income, treasuries are more attractive compared to corporate bonds.

‍The Dichotomy

• Slowing Economic Fundamentals

  - our proprietary macro model continues to trend below average with weaknesses in consumption and housing now amplified by jobs weakness. While lower interest rates (FED expected to resume rate cuts this week) may result in stabilizing the downtrend in housing, it's jobs that will remain the critical driver for both consumer strength and housing revival - spending and investing decisions are much more a function of cash flow confidence than interest rates.

source: Lighthouse Canton

• Breakout into New Highs

  - Both S&P and Nasdaq broke fresh ground last week, led by tech stocks. New highs, if sustained, are bullish and need to be traded long - whether this breakout can sustain will probably be sealed post FOMC mid week this week.‍

source: Trading View

• Resolving the dichotomy - price today is the sum of all future expectations, including fundamentals. Is price signaling a turnaround from a summer slowdown? While lower interest rates will help, it will require the FED to be more aggressive in easing and “hope” that there is enough jobs slack to avoid an inflationary spike. It’s a fine balance and at this stage, the probability of achieving this without a policy accident is still low.‍

• Can the divergence persist? Arguably, equities are being driven by strength in earnings within the AI ecosystem - an outcome largely immune to and detached from macro pressures. Given that overwhelming contribution to earnings and concentration in index composition, it’s entirely possible that even without help from the economy, markets, led by Tech heavyweights, will remain well bid.‍

source: Trading View