Consumer Price Index buoys stock market
A surprise decline in the October Consumer Price Index (CPI) bolstered investor sentiment, supercharged equity averages, and drove the U.S. dollar and interest rates lower. Is this just a flash in the pan, or has the tide changed?
Short term, the CPI news catapulted the markets closer to my target for this bear market rally. That is the good news. The bad news is that nothing has changed in the Fed's monetary calculus, nor mine.
The CPI data reflected a 7.7% increase over last year’s 7.9% expected, and a 0.4% increase month-over-month. On a "core" basis that strips out food and energy, the CPI declined as well. These numbers were only a smidgeon below expectations. And yet, they were still a heck of a lot better than last month's print, which saw core inflation hit its highest level since 1982.
A reader might ask why that small tick down in inflation justified a 5.4% jump in the S&P 500 Index, and a 7.74 % move higher in the NASDAQ. The answer is no, but it just underscores the power of short covering in a down market. The gains improved investor sentiment substantially, but sentiment is a fickle thing. Here are two more weekly examples.
The midterm election outcome disappointed many on Wall Street. Traders expected a Republican "red wave" that would roll back many of the Democrat's initiatives, or at least prevent new ones from being passed.
The expected GOP flood would also ensure no new taxes or spending plans over the next two years. That trouncing failed to materialize. The markets declined on the outcome, as sentiment immediately soured. That made little sense to me. Why?
Despite investor disappointment, there is still a high probability that Republicans are expected to take the House. The Senate, on the other hand, is a toss-up with the outcome not known for weeks. The bottom line is that in a divided Congress, which is now almost a certainty in my opinion, means that most, if not all the outcomes, traders were hoping for will happen anyway.
This week, sentiment was overwhelmingly bearish in the crypto market, as well and with good reason. The rapid collapse of FTX, a $32 billion company and crypto exchange, stunned financial market players worldwide. FTX was pioneered by a 30-year-old billionaire, Sam Bankman-Fried. Over the last two years, FTX, under Bankman-Fried’s direction, spent hundreds of millions of dollars bailing out struggling crypto firms. Fried, a major donor to President Joe Biden's presidential campaign, was a frequent visitor in the halls of Congress and was considered a stabilizing presence in the troubled crypto market.
Last week, several Twitter posts by FTX's main competitor, Binance, questioned the stability of FTX's business, sparking a $6 billion bank run on the company. That precipitated a crisis, resulting in a potential bail-out of FTX by rival, Binance. However, Binance subsequently backed out of the deal, citing "mishandled customer funds" and regulatory investigations, leaving FTX on the verge of collapse. It now seems bankruptcy of FTX is assured.
Negative investor sentiment has coursed through the crypto markets with traders and investors dumping everything they can. The present attitude of investors is that no company or currency in the crypto space is safe from extreme volatility. The reasoning goes that if a name-brand company such as FTX can go under in a matter of days, who will be next?
As for the overall market, we are on track in my latest prediction. We should see the S&P 500 Index hit my target of 4,000-4,100. Early on Friday morning in the overnight futures markets the S&P 500 kissed 4,000. As I said weeks ago, I am expecting this rally to end sometime in the middle of November. Timewise, that should mean we reach a top in this latest bear market rally in the next week or so. And then what?
Unfortunately, we go down again.
Bill Schmick is registered as an investment advisor representative of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at bill@schmicksretiredinvestor.com .Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.