Stocks Sell Off Following This Week’s CPI Report and Fed Announcement: Market commentary from Cabana’s CEO – December 15, 2022

2 months ago

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Despite getting a good CPI report Tuesday and a big initial rally, the broad stock indices (S&P 500, Dow Jones and Nasdaq) gave up the majority of gains and the S&P 500 closed below it’s 200-day moving average. Yesterday, we got the expected 50 basis point increase in the Fed fund’s rate. The rate is now in the range of 4.25% – 4.50%. More importantly, board members raised their terminal rate expectation to more than 5% in 2023. This suggests that we have another three 25 basis point hikes in the coming months. Chairman Powell in his press conference reiterated that he would need to see substantially more evidence that inflation is cooling before backing off. Stocks immediately sold off, notching another down day for investors. Markets have followed up with more selling this morning.  

To me, the Fed’s stated position is an error as it is clear from just living that prices are falling. Gasoline prices have dropped, used car prices have dropped, real estate prices have dropped. Month-over-month core CPI is below the preferred clip (0.2 vs 0.3). This is all before the impacts of this rate hike cycle really kick in. The Central Back appears to be solely focused on the tight labor market and the resulting wage inflation. The idea is that as long there are more jobs than willing workers, companies will have to pay higher and higher wages to compete for those willing to go back to work. This drives costs up as companies struggle to make profits. I am no economist, but it sure seems to make sense for us to take a pause for a quarter or two to see how this shakes out before we drive the economy into the ground. As things stand now, we have an awfully good chance of a serious recession next year. 

Stock prices (SPY) remain rangebound between support at 3900 and the 200-day moving average at 4002. We have made quite a bit of headway coming off the October lows but continue to struggle to close the deal on a sustainable breakthrough. This is typical of bear markets and should come as no surprise given the inverted yield curve, aggressive Federal Reserve, and declining corporate profits. Santa may surprise us with a rally into year’s end, but we are running out of time and reasons.  

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June 22, 2022

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