Last year saw equity markets climb a wall of worry as most major equity indexes saw double-digit growth despite the majority of pundits calling for a recession during the year. Our models started getting bullish in October 2022 and remained that way for much of 2023. After the robust rally we saw in the fourth quarter, our sentiment models indicate that market participants may be overly optimistic.

Interest rates are rising, and decreasing liquidity in the markets continues to put pressure on the economy. However, the recent market pullback and low current investor equity exposure are presenting the opportunity for a rally in the fourth quarter.

After a brief pause, the Fed raised rates by another 25 bps in its latest policy announcement. The current level of Fed funds (5.25%-5.50%) has not been seen in 20+ years. The economic impact is yet to be felt fully, but we are already seeing signs that liquidity is shifting from being a tailwind to a headwind.

The Fed raised rates by another 25 bps in their policy announcement last week, which the market mostly took in stride as the increase was expected. (Yes, that is the same opening sentence from our last Market Update written in March.) Growth stocks outperforming Value stocks has been a major theme year-to-date.