When there’s a huge information launch, I like to take a look at the market’s response earlier than seeing the numbers. I’m extra within the response to the information than the information itself.*
One month in the past I used to be driving into the town with Josh, ready on the CPI report with my face glued to my cellphone. Futures tanked at 8:30, and I knew inflation got here in hotter than anticipated. Certain sufficient, the market was none to happy that core CPI elevated on the quickest tempo since 1982.
The fed had achieved 5 charge hikes to that time, which didn’t do something to decelerate the speed of worth will increase.
The fed can’t repair provide chains. They will’t pump oil. They will’t manufacture semiconductors. They’ve one software to decelerate the economic system, which didn’t appear to be working.
Throughout that automotive journey in, I may solely assume, how excessive will they should take charges to decelerate demand, and what kind of injury will that inflict on the inventory market, and extra importantly, the true economic system?
Nicely wouldn’t you understand it, on the day after we bought the worst inflation print in 40 years, the S&P 500 gained 2.6%. However after all, that’s solely half the story.
In September, headline inflation rose greater than 8% for the seventh consecutive month. And as I already talked about, the market’s quick response was not fairly. The S&P 500 gapped down 1.6% on the open and proceeded to careen decrease, at one level falling as a lot as 2.4% on the day, which was 27% decrease than the excessive print from earlier within the yr. After which, for causes that no one can probably know, shares went vertical. They gained 5% from the morning’s low, closing 2.6% larger on the day.
On The Compound and Buddies that afternoon, we spoke about how humorous it could be if the market bottomed on the day after we get the worst inflation information. We referred to as that episode Good Information is Dangerous Information, as a result of generally markets are bizarre like that. The pondering was, possibly issues are so unhealthy that the fed would decelerate the tempo of charge hikes. Now that didn’t occur, and it’s too quickly to declare that day the backside, however the risk is in play.
Yesterday inflation got here in at 7.7%, which in a vacuum is just not good. However markets don’t work in a vacuum. They transfer on expectations. Yesterday’s traditionally excessive print was not as unhealthy as we feared, and the group went wild. The S&P 500 gained greater than 5% for simply the twenty third time going again to 1950. I repeat, inflation was 7.7%, and the inventory market cheered like we had simply solved world starvation and world peace.
As you very effectively know, gigantic day by day positive factors can solely occur in unhealthy markets when absolutely the worse doesn’t come to move. The desk beneath exhibits whenever you had these kinds of positive factors. You’ll see 1987, 2002, and numerous 2008. When shares gained 5%, on common they have been in a 36% drawdown.
Shares don’t transfer on good or unhealthy, they transfer on higher or worse than anticipated. And when expectations get too excessive or too low, it’s regular to see a violent response like we did yesterday. It’s nice to see shares transferring larger not on hope that the fed will pivot as a result of issues are getting so unhealthy, however as a result of the information that was inflicting them to maneuver so aggressively is definitely exhibiting indicators of enchancment. Excellent news is sweet information.
We’re not out of the woods but by way of inflation. It’s good to see, nevertheless it’s just one month. And the reality is, we’re by no means out of the woods. We’ll transfer previous obsessing over inflation to worrying about why inflation goes decrease within the first place. Softer demand will result in decrease spending which can result in decrease earnings which ought to theoretically result in decrease inventory costs. Until! Until the market has already discounted that. After which will probably be time to fret about one thing else.
*First transfer is at all times the mistaken transfer. Besides when it’s not