The Closing Bell--An update

 

The Morning Call

 

8/24/22

 

I am still not back at work; but I have hit a down period. So, I thought that I would write an update.

 

You may recall that I believe that the critical issues posed to the economy and the Markets over the intermediate term:

 

1.      how deeply embedded is inflation in our economy?

 

2.      given the answer to 1., how firm will the Fed remain in its policy decisions to bring the inflation rate back to acceptable levels?

 

In addressing the latter issue, I noted: Unfortunately, the turd in punch bowl is that the Fed does not have well documented history of courage. Powell’s narrative following the July’s FOMC meeting, suggested that his bias remained on the dovish side. Hardly surprising given that the Fed has been consistently dovish since the Greenspan era even when facing the rampantly inflationary mortgage backed securities moonshot. In short, the turd was still in the punch bowl with the Fed pursuing its unspoken third mandate not let the stock Market plunge [the Fed ‘put’].

 

That said, the Market provided its usual response to a reiteration of the Fed ‘put’ and accelerated to the upside. Unfortunately (for the bulls), comments from other Fed members the following week suggested that a slightly more hawkish take on inflation, which (1) just keeps alive the whole notion that these guys are clueless and (2) gave investors pause.

 

As to question #1, the inflation numbers came in below estimates last week, providing a reason to believe that the economy may have seen peak inflation. While I don’t disagree with that idea, it does not really address the answer to question #1---how deeply embedded is inflation? It is all well and good to be happy that inflation may be going from 9% to 6%. But that is not the issue. The issue is how tough must the Fed remain to get inflation back to 2%.

 

In short, there is almost no good reason to make any assumption yet about how deeply embedded inflation is and less reason to suppose the Fed has any more clarity about dealing with such. Indeed, its continuing back and forth, on the one hand/on the other had routine is wearing very thin and inspires little confidence in me. All that said, patience remains a virtue. Sitting on the sidelines is a pro-active strategy.

 

To give some visual perspective to this commentary, I thought a technical update might be helpful. I have just done the S&P. But as you can see, the post FOMC meeting Powell commentary along with the better inflation numbers help push the index through the initial 23.6% Fibonacci retracement level. But near the 200 DMA and the upper boundary of its short term downtrend, it lost momentum and rolled over. That does not mean that the rally is over or that ‘the’ bottom isn’t in. But it does mean that the index is acting in a predictable way. So, watch the 100 DMA level (`4085) for support and if that fails than the next visible level is the combo of the initial 38.6% Fibonacci level (~3817) and the lower boundary of its intermediate term uptrend (`3796).

 

 

 

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