February 11, 2022
Good morning,
Our equity rebound rally took a severe blow yesterday. Between a stronger than expected CPI report (inflation) in the morning, and Fed Reserve Bank of St. Louis President James Bullard’s afternoon remarks that he would favor a 50bps intra-meeting rate hike (meaning now, before the next scheduled Fed meeting in March), equities plunged 2% or more on the major indexes in about an hour.
Was yesterday’s blow to the rally fatal? As fast and severe as it was, I don’t’ think it was fatal. I do think it is looking increasingly less likely that this past two week rally will not take us to new highs on the major indexes, which will likely mean the official end of our 24mo long cyclical bull market. Labels are placed on cycles after the fact so I don’t give them all that much weight. But the market’s recent behavior does suggest a regime change in trend is afoot. It is particularly important at this time to remember that the end of a bull trend does not necessarily mean the beginning of a bear trend. We could be in for, and I suspect will be in for a trendless market in weeks and months ahead.
Economists and Fixed Income Strategists have all weighed in over the past 24 hours, as inflation looks to be over 7%, Fed Funds are still targeted at zero percent, and the Fed is still in easing mode (ending in March according to their plan, but that could change today). A most unusual fact pattern. At times like these, when the pundits are all scribing doom and gloom – higher rates for as far as the eye can see – I try to remember that crowd mentality over-reacts. The best middle of the road rate forecast I’ve been able to glean is more near term pain (higher rates), but the pressure driving rates higher should begin to subside in the second half of this year.
Perhaps equities are looking though the next few months of seemingly inevitable rate pain. They usually do (look ahead, I mean).
Have a good weekend,
Mike