by Robert Holman | The Defensive Advisor | www.defensiveadvisor.com
STOCK MARKET RATING … 5.0 (0-4 bearish, 5 neutral, 6-10 bullish), a revised rating.
· Objective – Make this report a 2-5 minute read with actionable information.
· Use – Investors need to make their own portfolio assessments.
The following comments regarding Thursday’s CPI report come from Briefing.com:
The key takeaway from the report isn't singular … (1) The CPI report helps validate the peak inflation view; (2) The report is apt to compel the Fed to take a less aggressive rate-hike approach at the December FOMC meeting; (3) Some encouragement will be borne out of the understanding that the shelter index (computed with a lag) contributed more than half of the monthly all-items increase, suggesting price increases moderated in many other areas.
The following comments come from Dan Niles at Satori Fund:
Shelter (home costs and rent) makes up 30-40% of all CPI measures and rents typically peak about a year after home prices peak (which was in March 2022 at a 21% increase). <RH: Since shelter may accelerate moderation in the CPI in the first half of next year, the Fed may be willing to consider a pause in rate hikes at that time>.
Of more importance, Services make up 75% of the US economy, and there are 10.7 million open jobs there versus only 6.1 million people unemployed … so the Fed has to kill-off jobs to correct the imbalance, which will lead to recession next year. <RH: an excess of jobs over applicants can lead to wage inflation>
These comments help to give us a perspective on future trends in the CPI. The good news will be that as inflation cools, growth stocks will rally.
My perspective this week – As I often say, “You can’t fight the Fed, the financials or the fear” – while investor responses aren’t always immediate, they are always inevitable. There has been a definite shift in at least one of these components, and thus I believe we are transitioning to a period of change. Hence, I’ve raised my overall stock market rating to 5.
The CPI has come down from 9.1% to 7.7%, but the Fed’s target is 2.0 - 2.5%. The market likes the moderation in inflation and is it’s only a bear market rally, because:
· Fed rate hikes are not over, just receding to 50bp, and
· Corporate earnings are just now being taken down by the analyst community, and
· How do we know the Fed will not raise interest rates materially higher?
Thursdays CPI report resulted in a 25bp drop in yields on 10-year Treasury Notes. That is an almost unheard-of movement; it’s a huge drop in interest rates. This led to a huge up-day for the markets, with the DJIA moving up +1201 points.
The S&P 500 has seen 6-7 bear market rallies this year, but it is down 16-17% for the year and is flat for the last 6 months. But I believe change is coming.
In other news, the DJIA dropped 300 points on Friday, as FTX, the second largest crypto-currency exchange, filed for bankruptcy. Then it rallied, showing strength. The FTX chairman resigned amidst allegations of misuse of funds. This seems to be a) bigger than the Enron bankruptcy, b) quicker than the Bear Stearns bankruptcy, and c) more mis-managed than the Long-Term Capital Management bankruptcy. It is not believed to be systemic.
Technical indicators are emerging in several places that show a favorable time for market re-entry. But, if the fundamentals change, so will the technical. And key inflation reports are just ahead that could alter the perception of the trend of future rate hikes.
While I’m tempted to raise my market rating into plus territory, I want to see more evidence showing that would be the right thing to do. Remember: no one knows the future. We are all just guessing.
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Learn from the Bible: Proverbs 15:22, 21:5, 22:3 and 27:12, Ecclesiastes 8:7, Joshua 1:9, Proverbs 3:5-6, Ephesians 1:17, 1Chronicles 29:11-13, and 1 Chronicles 12:32. I recommend you read them in this order.
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