If you listen very closely, markets may be telling us a new story. All this week we’ve heard from Fed officials regarding their tough stance and intent on ‘not stopping until the job is done.’ Jerome Powell continues to harness his “inner Volker” and made it very clear that more rate hikes are on the table in their never-ending quest to fight inflation. Fightin’ words that have normally smacked around Mr. Market and given Bears the excuse needed to sell stocks at a rapid pace. Ironically enough, despite this tough talk, markets have remained green all week. Thursday morning, the European Central Bank (ECB) in their own desperate fight against inflation, raised interest rates another 75bps quickly sending domestic equity futures lower. Shortly after the bell, however, the red turned into green as buyers stepped in to snatch up any remaining bargains.
Folks are often confused at how the markets will often zig when news flow zags. For example, at the depths of Covid when the hour was the darkest, markets found a bottom in March of 2020, long before any real ‘relief’ had been announced. I remember speaking with folks who couldn’t believe the market was advancing day after day when the news was not improving, in fact, it seemed to be getting worse. As they often do, stocks were sniffing out the stimulus, Paycheck Protection Program (PPP) Loans, and had shifted their focus onto companies that were benefiting from the ‘stay at home’ movement. If you waited for the news to reflect improvement, the market had already bottomed and was well on its way toward new highs. While it’s way too early to get excited, from my vantage point, this week’s bullish action in the face of hawkish Fed actions, domestic and abroad, may be speaking its own tale about the future.
So what could stocks be sniffing out this time?
At the end of July, the spot price for crude was $98.30 a barrel and ended the month right around $89.00 a barrel. This is over a 9% drop in one month. While not enough to impose a significant influence on the year-over-year Consumer Price Index (CPI), this monthly decline follows July’s drop which has a significant influence on the month-over-month CPI numbers. Many other commodities have cooled off considerably this month, while the housing market seems to be taking a pause with everything from new construction to closings seeing a sharp decline.
This coming Tuesday, one of the most important economic data points will be released – the August reading for the CPI. Based on the falling prices of many of the variables making up this report, my guess is we should see a very significant change in CPI month over month, which will certainly hint at the fact that inflation has peaked and is on its way lower. If my read here is correct, look for the market to continue its advance as Bulls believe the Fed may not need to keep raising rates.
Should this transpire, does it mean we’re out of the woods? Not quite. It’s becoming quite clear that one of the Feds’ greatest tools at present is the microphone. Bulls and Bears alike will trade off the data, which may suggest peak inflation, however, Powell will want to make sure Bulls and Bears alike realize they’re not backing down. It wouldn’t surprise me one bit if shortly after any market advance, the Fed once again steps up to throw out some cold water. Like a governor on a throttle, I won’t be too surprised when he once again pumps the brakes should any bounce begin to gather steam.
I continue to be more of an opportunist on this decline. Many stocks and sectors that folks couldn’t get enough of this time last year have fallen to levels that are quite attractive. What continues to baffle me is the height of negativity regarding financial markets and stocks.
I continue to relay to folks that the stock market remains the only place in the world that when it goes on sale, people run away rather than snatch up any bargains.
Slow and steady wins the race and despite this year still being a stinker, the idea of jumping in, jumping out, catching this move or that is futile. There are times when one has to simply be patient and let the action play out having full confidence in their allocation, diversification and longer-term plan. Stocks are on sale at the moment and, historically, that has traditionally been more of an opportunity than a warning.
Until next time.