Traders continue to fail to understand the Fed’s seriousness in the fight against inflation. That’s why we had a big summer rally that ended with stocks (SPY) hitting new lows. And that is why traders misunderstood the 11/2 Fed statement that sparked a rally before Chairman Powell spoke and reminded people of the pain still ahead. For example, traders triggered another bear market rally after the recent CPI report. Read the commentary below to understand why things are rather bearish and why the stock will move lower again.
I wrote this commentary Reitmeister Total Return suffered Thursday after the lower-than-expected CPI report sparked a shocking rise in stock prices.
However, I realize this is an important message for all investors to hear about not getting sucked into another bear market rally before stocks plummet again. Here is that commentary in full:
“My wife and I got up at 3:30 this morning to catch an early flight to Phoenix. Grand Canyon today. Wedding of 2nd cousin and other family events in phoenix tomorrow and saturday.
Luckily I got into vacation mode by turning off my phone. So I didn’t learn about the CPI report and the big rally until I got to Phoenix.
My first reaction was laughter. That traders are again overreacting to things they don’t fully understand.
Kind of like how the market (SPY) recovered 2% minutes after the Fed announcement came out last week, only to fall 3.5% back to the finish line as Powell shared details of the “pain trainthat is still coming our way.
Now let’s look at it from above. The target rate for inflation is 2% or less.
So let’s imagine that this report proves that inflation has peaked (which may or may not be true). Hurrah. We are now at 7.7% even after 6 consecutive rate hikes. But the inflation target is again 2%.
Do you really think the Fed’s job is done now?
They told you just a week ago that this is a long battle against inflation. With previous statements about not cutting rates until the end of 2023. And that the window to create a soft landing is shrinking.
Their goal is to weaken the economy, reducing demand. And if you have the same supply and lower demand, you have lower prices.
These are serious academics who realize that this is a lengthy process. Not an easy button. And just because inflation may have peaked, doesn’t mean it has eased down to 2%.
NOTHING from last week’s Fed announcement has really changed. The sum of 6 interest rate cuts alone “could” have led to a spike in inflation. But the battle to achieve a stable inflation rate of 2% is far from over.
As we have already seen, there are many rallies during a bear market. Much stems from nothing more than people getting tired of selling. However, I agree that today’s CPI report is a good reason to have another bear market rally before people wake up and smell the pain again.
I suspect this catalyst may have an advantage around the 200-day moving average (long-term trendline) of 4,082. Maybe even before that falls apart at 4,000. Yet there is nothing here that makes us want to join the bull festival.
Again, I have a degree in economics, which gives me a better understanding of how the Fed works. And why NOTHING has changed from the very serious statements they said a week ago.
Reity, is it possible that the bear market is over?
Yes possible. Just not likely.
Possibly because economics is an imprecise science and crazy things can happen. This means that the reduction in inflation could happen faster than expected. Not as fast as today’s rally suggests. But faster than previously believed and a 25% peak-to-trough decline for the S&P 500 (SPY) could be good enough.
However, for all the reasons stated since I turned bearish in May… and for all the reasons that have been brought up over and over again in recent comments. And especially knowing the nature of the people who run the Fed…they are not impressed.
7.7% inflation does not equal 2%, whatever nice house mirror you want to use.
At best, the recession will be more superficial than expected. At worst, inflation is still too sticky and more rate hikes by the Fed are needed + more quantitative tightening + more time leading to a deeper recession > lower corporate earnings > lower stock prices.
My guess is the latter. But I’m very willing to keep looking at the data and change my tune if inflation can be miraculously corrected before the economy falls.
Update 11/15/22: I just want to add to the above that these sentiments were echoed by Fed Governor Waller over the weekend. Here are some of his key quotes that should emphasize that the Fed is still on track to quell inflation and likely still spells pain for the economy and further stock price declines:
“The market seems to have moved way ahead on this one CPI report. Everyone needs to take a deep breath, calm down. We will see a continued streak of this kind of behavior and inflation slowly start to come down before we really think about getting here we have a long, long way to go… Rates will continue to rise and they will stay high for a while until we see this inflation fall closer to our target (2%…not 7.7%).”
What to do now?
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And now is a good time to reload as we face another bear market rally before stocks hit even lower lows in the weeks and months to come.
If you successfully sailed through the investment waters in 2022, you can ignore it.
However, if the bearish argument shared above has you curious about what happens next…consider getting my update”Bear Market Game Planwhich details the 9 unique positions in my timely and profitable portfolio.
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY Stocks. Year-to-date, SPY is down -15.85% versus a percentage increase in the benchmark S&P 500 index over the same period.
About the author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the company, but he also shares his 40 years of investing experience in the Reitmeister Total Return Portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.