2 Month Rally to Stall Speed
Equity markets continued their 2-month rally last week as hints of “FOMO”, fear of missing out, bubbled to the surface. A softer-than-expected July CPI report was medias easy answer to “why?”. Of course, the markets were already up almost +13%, off their mid-June closing lows BEFORE the government data was released. CPI printed 8.5% year to year inflation, 5.9% year to year core, and as politicians in DC were quick to point out, zero month to month. It’s increasingly evident to those waiting on government data that the worst should be behind us in terms inflation momentum. The 1-month annualized change in core inflation was 3.8% in July, the slowest in 10 months.
The S&P 500 rose 1.5%, with energy and banks posting the biggest gains. After rallying almost 17% from its mid-June low, the S&P500 is now running just underneath its 200-day moving average.
The bear case for stocks: we are a long way from 2% target inflation for the Fed. This process will be slow even if we’re past the peak. We will only get there with more tightening and some meaningful economic slowdown. The 2s10s yield curve remains well inverted at around 42 bps. Chart resistance is ahead with the 200-day moving average around 4320 on the S&P 500.
The bull case for stocks: See our podcasts since mid-June and July 1st’s, “Opportunity Knocks Early”. Periods past inflation peaks and falling have been some of the best on record for returns. There is still a lot of bearish sentiment and positioning to unwind with current readings from Investors’ Intelligence, AAII and Conference Board showing attitudes usually consistent with market lows. A slower Fed would be jet fuel for stocks in late 2022.
Earnings this week include a bunch of big retailers, including WMT, TGT, HD, LOW, TJX, ROST, and EL. Expect too much inventory and weaker outlooks. Outside of retailing, we get updates from other stocks, including DE, A, CSCO, SNPS, and AMAT.
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