Are Animal Spirits Running Into a Dumb Money Trap?
Rising confidence is coming from many sources, but it’s also crossing a key threshold suggesting traders have lost their heads.
How can stocks possibly be back in a bull market when sentiment has turned so negative about the economy?
“Dumb Money Confidence,” a creation of SentimenTrader
Where do such sentiments come from?
Now we come to the problem. The Federal Reserve has made it abundantly clear this week that it doesn’t want anyone to think that it will be relenting on hiking rates any time soon.
Behavior in both stock and bond markets is therefore fighting the Fed, which the oldest trading cliche in the book tells traders they must never do.
The Fed can raise the rates that it directly controls; but it also needs broader financial conditions to tighten.
If the bond market does not oblige, then the chances rise that the Fed has to push harder, risking a financial accident in the process.
All of this is about sentiment. At some point, it could founder on cold economic reality. Quite apart from betting against the Fed doing what it says it will do, and making it harder for the Fed to tighten financial conditions, the dumb money is making a courageous wager on a soft landing.
John Authers Bloomberg 4 augusti 2022
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