What is The Sucker Rally?

Don't Fall for the Sucker's Rally The market has experienced some pain in the past couple of weeks. In the world of finance, we often find ourselves riding the tumultuous waves of market sentiment, witnessing the pendulum swing from extreme optimism to gut-wrenching fear. Recent weeks have been no exception. As the market experiences a painful bout of uncertainty, investors have been on a rollercoaster of emotions. Long-term interest rates have surged to levels not seen in decades, and the resulting relief rally appears tempting at first glance. However, seasoned investors understand that not all rallies are created equal, and this one, in particular, maybe a deceptive trap. Investor sentiment has shifted from extreme greed to extreme fear. Long-term interest rates have surged to multi-decade highs, leading to a relief rally. The relief rally is likely to lure many bulls into buying, but it is a sucker's rally. "We are in for a relief rally which is going to suck a lot of bulls into buying despite the fact it's a sucker's

rally. Don't fall for it"

Chart 1: The Federal Reserve National Growth Deficit

The Unstoppable Deficit The fundamental driver behind the current economic situation is the federal government's unstoppable deficit. The current national debt is $33.14 trillion, but that only represents the amount the government has borrowed, not the amount it owes. Interest rates are not at zero percent and are moving higher quickly, which affects the true debt. Recent quarters have seen a historic spike in interest payments on the debt, totaling just under a trillion dollars. With interest rates surging, half of the national debt maturing within the next year and a half, and additional deficit spending, interest payments alone could reach $1.25 trillion. "That Unstoppable force is the federal government's Unstoppable deficit... The federal government is going to be paying 1.25 trillion dollars just in interest payments alone"

Asset Class Performance After Interest Rate Hikes

For the first time in more than three years, the U.S. Federal Reserve has raised the target interest rate. It’s an incremental step towards fighting inflation that is at its highest level in 40 years. Not only that, the Federal Reserve is predicting six more interest rate hikes before the end of 2023.

What does this mean for investors and their portfolios?

In this 'Markets in a Minute' from New York Life Investments, we show the risk and return of select asset classes during the last three periods of interest rate hikes.

The Unstoppable Deficit: A Harbinger of Trouble

At the heart of the current economic landscape lies a fundamental concern—the seemingly unstoppable federal deficit. The national debt has ballooned to a staggering $33.14 trillion, but that figure only scratches the surface of the government's fiscal obligations. Rising interest rates, far from zero percent, are rapidly increasing the true burden of debt. Recent quarters have witnessed a historic surge in interest payments on this debt, approaching the daunting trillion-dollar mark. With interest rates continuing to climb, nearly half of the national debt is set to mature within the next year and a half. When coupled with additional deficit spending, the annual interest payments alone could reach a staggering $1.25 trillion.

The relentless growth of the federal deficit poses a sobering challenge to the stability of our financial system. As the government grapples with mounting interest payments, other sectors of the economy feel the ripple effects, including the world of investments.

Ex-U.S. developed country stocks had the highest average return of the select stock types. International stocks may be a hedge against interest rate hikes because, compared to U.S. large-cap stocks, they are more heavily concentrated in cyclical sectors like materials, industrials, and financials. These sectors tend to perform well when the economy is growing and rates are rising.

Within the realm of the alternative, global commodities were the strongest on average. The average is skewed upward because of the outsized return earned in the 1999–2000 period. Brazil, Russia, India, and China were rapidly industrializing, which required an enormous amount of raw materials, food, and energy commodities. The boom lasted for more than 10 years. Now with the Bric's Nations using their own currency and the global trade no longer being used for the U.S. Dollar, we no longer have the option of the income of a Global Commodities Cycle which was once known as a commodity super cycle. We have an unimaginable shortfall when it comes to the global financial structure. TRILLIONS of dollars have been spread out throughout the world which we would have eventually been returned into our economic rotation having been swallowed up by world economic transit.

As we can see from Graph 1, the federal deficit has been on an alarming upward trajectory, reaching a staggering $33.14 trillion. However, this number only tells part of the story. Interest rates are not static, and as they rise, so too do the interest payments on this debt. Recent quarters have witnessed a historic spike in these interest payments, approaching the trillion-dollar mark. With interest rates continuing their ascent, the prospect of annual interest payments reaching $1.25 trillion looms large.

Yet on Graph 2, Graph 2 elucidates the impact of surging interest rates on asset valuations. As interest rates rise, the dividend yields on stocks, represented here by the S&P 500, dip below the yields offered by U.S. treasuries. This phenomenon, known as "crowding out," results in the dwindling allure of stocks compared to the relative safety of treasuries. Bond funds like TLT, heavily invested in U.S. treasuries, have borne the brunt of this shift, with a significant drop of over 50% from their peak.

The allure of a relief rally, although tantalizing, must be approached with prudence. The underlying economic challenges, driven by an unstoppable federal deficit and rising interest rates, demand our attention and vigilance. As we adapt to these changing circumstances, we must also heed the cautionary tale of long-term passive investing and seek strategies that allow us to thrive in both bull and bear markets.

Negative Impact on Asset Valuations: A Dwindling Allure

The surge in interest rates on government debt has cast a shadow over asset valuations. The phenomenon known as "crowding out" rears its head when dividend yields on stocks, such as those found in the S&P 500, dip below the yields offered by U.S. treasuries. As interest rates on treasuries surge, the appeal of stocks dwindles in comparison. Bond funds like TLT, heavily invested in U.S. treasuries, have not been spared from the turmoil, plummeting over 50% from their peak.

Despite the glaring risks, some investors continue to flock to bond funds like TLT, leading to substantial inflows. While capital influxes can sometimes indicate confidence, in this case, they may be more indicative of a lack of understanding or a misguided quest for safety.

The Basis Trade: Hedge Funds' Calculated Move

Intriguingly, hedge funds have seized an opportunity amid this uncertainty through basis trading. This arbitrage strategy capitalizes on differences in interest rates and has led some major players to buy treasuries as part of their trading tactics. The motives here are more complex than they may seem, reflecting the ingenuity of seasoned financial professionals.

Technical Indicators Point to a Relief Rally: A Glimpse of Hope

Amidst the turmoil, technical indicators offer a glimmer of hope for those in search of a relief rally. The trend line has held firm for nearly a year, hinting at the possibility of an impending rebound. The Relative Strength Index (RSI) recently dipped into oversold territory, a sign that the market may be due for a bounce. Meanwhile, investor sentiment has plummeted into the depths of extreme fear—a contrarian signal that often precedes a relief rally.

It is most likely a short-term offset of inflated interest rates, 401K's being swallowed from large employees of companies that went out of business like Yellow Trucking, and I believe that the banks, along with the National Reserve have been 'Papering over" accounts for smaller to middle sized banks. That is the definition of hyperinflation. The Goal of the FED is to make us look away, and distract us until they can't keep the lid on the boiling pot any longer.

Indeed, we are on the cusp of a relief rally, with the recent bounce at the end of September aligning perfectly with the oversold RSI and the persistent trend line. However, this takes only a partial overlook into account. This isn't looking through the eyes of the financial backing of our US currency. How the Federal Reserve plans to

The Warning Signs of a Sucker's Rally: Temptation and Caution

However, as tempting as this relief rally may appear, it carries the ominous label of a "sucker's rally." The economic storm, especially in the realm of stocks, may have just begun. The danger lies in investors being lured into the false belief that the worst is behind us, prompting them to re-enter the market prematurely.

The economic tempest, especially in equities, remains a potent force. Many investors, driven by a sense of urgency and the fear of missing out, may return to the market at precisely the wrong moment. The lesson here is clear: don't be enticed by the siren call of a rally that might not stand the test of time.

Long-Term Passive Investing and Its Risks: A Cautionary Tale

Lastly, a word of caution for those considering long-term passive investing in a traditional portfolio. While this strategy has often been hailed as a safe haven, it may unwittingly lead investors to enter the market just as a major collapse looms. The pitfalls of the traditional 60-40 portfolio have been exposed, as history reminds us that buying in at the tail end of a major downturn can have dire consequences.

In these challenging times, investors must adapt and evolve, learning how to thrive in both bull and bear markets. The allure of the status quo may be powerful, but it's essential to recognize when old strategies may no longer serve us well.

As we navigate these treacherous financial waters, one thing remains clear: vigilance, adaptability, and a keen understanding of the economic landscape are our best allies in safeguarding our financial future. The road ahead may be uncertain, but with prudent decision-making, we can weather the storm and emerge stronger on the other side