Fed Pivot Bulls Buying Stocks Again

The headline CPI inflation rate reported this week was slightly better than consensus and stocks roared higher in response on hopes the Fed will soon pivot to a less restrictive policy. Bear markets slide lower into a hole of hope as investors, in this cycle, jump on every sign that Fed credit tightening is about to end, while stocks plunge even deeper as expectations fall short of reality. Inflation surged in 2021 and early 2022, fueled by massive Government spending programs and Central Bank accommodation. The Bear market in equities finally arrived in early 2022 when investors realized that the Fed was taking away the monetary punch bowl and pushing back on President Biden’s $4 trillion in handouts. As a 40-year Consumer Price Index (CPI) of inflation moved into an 8-month plateau this year, analysts increasingly assumed a disinflationary recession was coming. Dip buying money managers think the recession die has been cast and are once again expecting the Fed will pause rate hikes by year end. The consensus is that the Fed will start cutting rates in 2023, with pundits continuing to yell that the Fed is overtightening. Such a perspective is lacking evidence and a bit naive. The job market remains tight and inflation is still one missile strike away from 40 year highs. Until we have a few successive reports of monthly core CPI averaging less than 0.3%, bringing year over year CPI closer to 5%, the Fed is unlikely to pause or reverse its credit tightening endeavor to kill embedded inflation.

Fed pivot Bulls have been wrong all year, but the past month of retail sales does confirm a ray of hope that this month’s lower CPI is not a one off but a brand new trend that will continue. A healthy retail sales proxy for the economy and inflationary pressures is when same store sales growth averages close to 4%. During the strong consumer sentiment years under Trump, spending was growing at an unsustainable 6%+ rate. When the economy opened up after Covid with truly massive fiscal and monetary stimulus, combined with pent up demand from a housebound world, same store sales were growing at an astounding 12 to 22% rate. The Federal Reserve has no choice until at least Q2 or Q3 of 2023, in our opinion, to keep interest rates at economically restrictive levels. Once year over year housing and wage inflation fall next summer, investors can expect retail sales will begin to bottom and the Fed will start talking about future accommodation. Until the 2nd half of 2023 the discount stores like TJX should outperform while the major box stores suffer. Once the markets anticipate future monetary stimulus and an economic cycle low 6 months down the road, then consumer discretionary and technology stocks will reassert themselves as market leaders.

 

Hedge Funds, like everyone else, are most pessimistic with their lowest exposure to stocks near market lows. Commodity Trading Advisors (CTA’s) and Hedge Funds have been steadfast in selling stocks every month this year as valuations have generated losses in their portfolios. The recent 6-week rally has yet to entice professional hedgers back into equities. When they do, it will be a late confirmation that a major uptrend has already begun.

 

Our newsletters have forecasted an August to early October correction followed by a rally into November or early December before another correction low in early to mid Q1 of 2023. This continues to play out as extreme pessimism combined with the fairy dust of a Republican win in the November mid-term elections, generated a strong 15% stock market thrust higher into November 8th. After a minor pullback upon weaker than expected GOP election results, the better than feared core CPI inflation report of 7.7% on November 10th triggered another leg higher with a 9.5% jump in the SP 500 Index in just 2 days. Now we are seeing a ground swell of analysts using seasonality to further their Bullish forecasts into year end. Seasonality is a factor we care about and illustrate frequently in our charts, but we feel it may disappoint after a late November to early December rally phase ends. 

 

On our weekly chart, our indicators need another thrust higher before they all can test the ideal overbought zone. As per previous outlooks, we expect to use upward momentum into December as a period to reduce long stock exposure in preparation for yet another market downturn into Q4 earnings reports around mid-January to mid-February. 

 

 

 

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