My wife and I got up at 3:30 am this morning to catch an early flight to Phoenix. Grand Canyon today. Wedding of second cousin and other family events in Phoenix tomorrow and Saturday, states Steve Reitmeister of Reitmeister Total Return.
I happily got into vacation mode by turning off my phone. Thus, I didn't learn about the CPI report or big rally until I arrived in Phoenix.
My first reaction was laughter. Traders once again overreact to things they don't fully understand.
Kind of like how the market rallied 2% minutes after the Fed announcement came out last week only to fall 3.5% from there into the finish line when Powell shared details on the "pain train" that is still heading our way.
Now let's take it from the top. 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). Hooray. We are now at 7.7% even after 6 straight rate hikes. But the inflation target once again is 2%.
Do You Really Think the Fed's Job Is Now Done?
They told you just a week ago that this is a long-term battle with inflation. With previous statements of not lowering rates through the end of 2023. And that the window to create a soft landing is narrowed.
Their goal is to weaken the economy, which lowers demand. And if you have the same supply and lower demand, then you have lower prices. These are serious academics who appreciate that this is a long-term process. Not an Easy Button. And just because inflation may have peaked doesn't mean a smooth ride down to 2%.
Nothing from the Fed announcement last week has genuinely changed. Just the sum total of 6 rate cuts "may" have led to inflation peaking. But the battle to get to stable 2% inflation is FAR from over.
As we have seen already there are many rallies during a bear market—many arising from nothing more than people getting tired from 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 once again.
I suspect that this catalyst maybe has an upside to around the 200-day moving average (long-term trend line) at 4,082. Maybe even falls apart before that at 4,000. Yet there is nothing here that makes us want to join the bull party.
Again, I have an economics degree which helps me better understand the way the Fed works. And why nothing has changed from the very serious statements they said just a week ago.
Reity, is it possible that the bear market is over? Yes possible. Just not probable.
Possible because economics is an inexact science and crazy things can happen. Meaning that the lowering of inflation could come together faster than expected. Not as fast as today's rally would imply. But sooner than previously understood and a 25% peak to valley decline for S&P 500 could be good enough.
However, for all the reasons stated since I got bearish in May...and for all the reasons expressed again and again in a recent commentary. And especially knowing the very nature of the people who run the Fed...they are not impressed.
7.7% inflation does not equal 2% no matter what kind of funhouse mirror you want to use.
At best the recession will be shallower than expected. At worst, inflation is still too sticky and will need more Fed rate hikes + more Quantitative Tightening + more time leading to deeper recession > lower corporate earnings > lower share prices.
My bet remains with the latter. But I am very willing to keep watching the data and changing my tune if miraculously inflation can rectify before the economy tanks.
