Nov 8, 2023

Financial markets rallied strongly last week as both Equities and Bonds reversed recent price declines in both major asset classes. Stocks took their cue from lower Treasury yields following a more benign fiscal financing plan from the Treasury, friendlier rate speak from the Federal Reserve and softer economic data.

Last week's Halloween rally while a treat carries with it a trick - mainly that the bond market repriced for a more immediate growth slowdown while the stock market repriced for the more distant anticipated Fed reaction to such a slowdown. Thus, the weaker US payroll report and deteriorating ISM Services survey while supportive to lower yields carries with it the risks of earnings deterioration for stocks as growth slows if not recesses.
To be fair, stocks collectively have been embedding a growth slowdown for much of the last year as market breadth remained noticeably narrow since the October 2022 lows. Typically, bull markets show expanding participation from a broader number of market constituents. Some argue the recession if it arrived now, it would be well-anticipated and a potential clearing event given the persistent fear forged by prior tightening cycles. The rally since last year has been incredibly lopsided in favor of technology behemoths with superior growth outlooks and fortress balance sheets outperforming at the expense of smaller cap shares and value styles.
Given the narrowness of the market coupled with the magnitude & speed of interest rate hikes, a cycle slowdown remains an almost-obvious outcome with the recession call more debated since so many incorrectly forecasted a recession in 2023, they will be reluctant to make the same call again into 2024.

We find this behavior consistent with prior cycles when the negative impact of rate hikes becomes so obvious, it spurs hope monetary authorities will pivot. A pivot is more difficult this cycle with persistent inflation. The market's most reliable recession indicator, the Yield Curve remains inverted with short-term rates above long-term rates.

Concerningly, this Yield Curve inversion has been deep for considerable time and its recent steepening is considered a bearish one as long-term yields have been rising more quickly than the short end - consistent with the "higher for longer rates" narrative.

As the yield curve historically inverts about a year before recession and the economic data just started its deterioration to end October, we think trading rallies such as last week will contribute to volatility and such rallies are more of a tactical positioning shake outs and not the start of a more durable and trending lift to the broader stock market. We think a downtrend is in play but these Yield reliefs do provide for counter trend rallies, requiring steadfast risk & hedging considerations. Moreover, the elixir to growth slowdowns is stimulus and interest rate cuts while forecasted to be sometime sooner next year, remain too far off to dismiss the earnings & economic hiccups we are likely to endure.

In closing, the negative hits from rate hikes are baked in the cake and now playing out. The process of reversing them usually comes too little too late from central banks. We think it is just too soon to look through bad news as this cycle, while late or extended innings, has not had its cathartic bottom which historically ends with employment data rolling over. Time will tell and we will continue to anticipate all cycle outcomes and their impacts on asset markets.

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· Closed-End Fund Risk: Closed-end funds (CEFs) are subject to investment advisory and other expenses, which will be indirectly paid by the Fund resulting in duplicative fees and expenses. CEFs are also subject to management risk because the advisor to the underlying CEF may be unsuccessful in meeting the fund's investment objective.

· Equity Securities Risk: Equity securities are subject to changes in value, and their values may be more volatile than those of other asset classes. These changes in value may result from factors affecting individual issuers, industries, or the stock market.

More information about these risks can be found in the Fund's prospectus.

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