July 18, 2022
Good morning,
Persistent “sticky” inflation, the Fed’s higher for longer rate hikes to combat it, and the likelihood the economy falls into a recession as a result, if it isn’t in one already, is the only narrative on investors’ minds currently. And yet, the equity market (in S&P 500 terms) rallied 2% on Friday on no good news and is up another +1% pre-open this morning on more no-good news. With the VIX at its yearly low on a weighted basis this may not be just volatility.
I doubt there’s an investor with a pulse who does not think Friday’s rally isn’t just an oversold blip or at the most a brief bear market rally if it continues. I’m uncomfortably in that camp as well. Uncomfortable because history is clear on this point – the market will do what hurts the most investors when everyone is thinking alike.
The Fed rolls into its blackout period ahead of its month end FOMC meeting, economic data is housing oriented only, and earnings season gathers steam this week. If Friday’s move carries over into the week, we’ll be very careful to measure it as something that can last or an opportunity to sell strength – which is still the most likely outcome. Any rally will have to prove it isn’t a bear market kind even with history on its side.
Be well,
Mike