David Cervantes argues this is not a bear market, expects equities to grind higher, and thinks bonds are the most vulnerable asset because the Fed is likely to stay on hold amid sticky inflation and a still-resilient labor market.
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This interview centers on Cervantes’ view that the current pullback in equities is a normal correction rather than the start of a bear market. He compares the setup to 2022 in terms of simultaneous pressure on stocks and bonds, but says the bigger lens is the business cycle: the economy is soft, likely to have a Q2 growth hole, and then recover later in the year if geopolitical disruptions ease. He repeatedly argues that the market is not pricing a deep enough downturn to justify a true bear-market call. On rates and bonds, Cervantes says the bond market is not sending a clear signal because two forces are offsetting each other: inflation pressure from energy and food versus a labor market that remains balanced. His base case is that the Fed does nothing this year—no cuts, no hikes—unless core inflation becomes more persistent or the labor market weakens materially. …
Tactically, the setup favors staying cautious on bonds and watching whether oil/supply disruption keeps feeding inflation prints over the next few releases. In the near term, equities look more resilient than fixed income unless the labor market cracks or the war shock worsens materially.
Over the coming months, the base case is a soft patch in growth followed by stabilization if physical energy flows normalize and estimates keep rising. If core inflation broadens beyond energy and food, the Fed’s hold pattern becomes more hawkish and bonds stay under pressure.
Structurally, Cervantes is warning that repeated supply shocks can push the U.S. away from an optimization-led economy toward a resilience-led one. That would imply lower productivity, lower margins, and a more European-style growth profile over time.
We are nowhere near a bear market; the current decline is a normal correction rather than something severe.
He says a bear market would require something closer to an 18%-20% decline, while the market is only around -10% at the lows.
The U.S. economy will likely have a growth hole in Q2, with Q1 soft but not recessionary and Q4 improving later if supply conditions recover.
He links the weakness to the Middle East disruption and physical oil flow problems, then expects a later rebound.
The bond market is not currently sending much signal, but fixed income is the most vulnerable major asset class because inflation and labor-market strength limit Fed easing.
He repeatedly argues that bonds face a poor setup even without an immediate recession.
Which will survive this storm this year: stocks or bonds? Do we still have room for the 60/40 portfolio?
Cervantes says the 60/40 portfolio still has room, equities should be all right, but fixed income is a toss-up and ultimately more vulnerable.
What do you think the bond market is signaling?
He says the bond market is not sending much signal right now because labor is balanced and inflation looks like a supply shock the Fed can look through.
Is this a bear-market rally or is the bottom in?
He says it is not a bear market at all and expects the market to break higher eventually because earnings estimates are still being revised up.
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