The year has started very strongly. It is also very calm.

Here is the S&P 500 since late October:

That is about as good as it can get.

The market isn't just rising. It is rising incredibly consistently and calmly.

Soak it up!

Both those qualities are obviously great and it could always continue. There is no rule saying that everything has to go to hell. In fact to the contrary, good times can last for quite a stretch.

And there are reasons it could last.

As one commentator said after this week's regular Federal Reserve meeting:

​The Fed is providing a lot of liquidity in an already liquid environment. ​

But generally statistical mean reversion is real. And while this sort of quiet ascent is impressive to witness (and even better to enjoy) it is also guaranteed to end.

We have recently argued that buoyed by strong economic growth, quiet inflation and, most especially, plentiful liquidity, the current market rally could continue for some time.​

That is great but what could change this trend?

There are obviously a few possibilities out there - war, geopolitics more generally and of course the bottom mysteriously - but putting those aside there seems to be a big catalyst staring the market right in the face:

Higher interest rates.

Not that you would know it looking at the stock market but interest rates are already high. What seems lost that they could head higher still.

Right now there is a powerful consensus that interest rates will FALL in 2024. That may still happen. There are plenty of reasons - including political reasons - for why they could but it also means that all the risk is the other way.

Namely, what if interest rates go up, not down? What if the next move by the US central bank is a hike, not a cut.

That wouldn't just be a shock. It would also underline how high interest rates already are and also demonstrate that they could go far higher still. This might not be the most likely outcome but the key point is that no one is worrying about it at present.

In some ways all of this is a good thing! It isn't great for some things (hello people trying to buy a first home) but a decent and stable interest rate is not some horror. In fact, a high and positive but relatively stable real interest rate is the natural way of finance. What was an outlier was the decade+ of abnormally low interest rates post-Great Financial Crisis.

However, what is fascinating about right now is that after caring deeply about the problems that high(er) interest rates suddenly the stock market couldn't care less.

All the frantic concern that the Federal Reserve would keep hiking no matter what last summer and early autumn has suddenly evaporated. The same people who were predicting doom and gloom in 2023 are now on the same programs and social media sites serenely predicting that the US will experience multiple interest rate CUTS in 2024.

There is already plenty of against them but they seem totally oblivious.

Maybe they are right!

The still growing economy, the stubbornly high inflation readings, the geopolitical turmoil around the globe, the slow-but-steady rising oil price, all are forgotten by the soothing balm of a smoothly rising stock market and plentiful liquidity.

We couldn't be happier about that state of affairs but equally, we refuse to pretend that we have reached some new nirvana where normal rules no longer apply.

For one thing, the idea that we will cut interest rates this year isn't a lock.

For another, there are some powerful trends setting up for a radical shift in the current environment. All of the below are as close to certain as it gets in an uncertain world.

Here is a brief list:

• The first is that it is very possible that the plentiful liquidity environment gradually comes to an end later this spring and into summer as we have recently documented.

• The second is that inflation is still above target and gives every sign of stubbornly staying elevated in the months ahead.

• The third is the slow but steady sucking sound as government spending decreases. Some of the Covid-19 fiscal stimulus has already come to an end but some of it is only winding down this year.

All of this points to a very different environment at some point in the near future. That doesn't mean a recession but it does mean more difficult conditions for strong economic growth.

There will be headwinds, rather than tailwinds for the US economy might be one way to think about it.

That is something that is getting completely lost at the moment while the hype cycle sends IPO stocks soaring and other companies are setting records in terms of sales and profits.

The challenge with all this is, as usual, timing.

To us it seems more likely that the market could turn over before the US election but it might not. There are plenty of reasons - including interest rate cuts or anticipation thereof - that could keep thing supported for longer than we would believe credible.

We would just caution you think about the wings potentially changing for the worst and the possibility that it could happen on a dime.

Right now the market expects the first interest rate cut to come in June. Just this week the probability of that quietly fell from around 60% to around 50%. There is no reason that it can't go back up but staying open to the alternative is not just prudent but probably wise.

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