(Please enjoy this updated version of my weekly commentary published September 8^th, 2022 from the POWR Stocks Under $10 newsletter).

Over the last week, the S&P 500 (SPY) is up by just under 1%. This kind of undersells the market’s recent volatility (or choppiness). In fact, we briefly broke below the 3,900 level early this week, before the recovery to 4,000 at the end of this week.

Today’s session encapsulated this choppy environment. After a strong session yesterday, the market gapped down. Then, recovered these losses before tumbling lower due to a hawkish ECB meeting.

However, these losses were recovered by the close as the market looks ahead to the CPI report and the upcoming FOMC meeting.

It should be noted that the market has done an admirable job of absorbing bad news without falling apart.

This includes a steady stream of hawkish FOMC speakers, a hawkish ECB meeting, a strong US dollar, and more signs of weakness in the housing market. Yet, the S&P 500 (SPY) has stayed above the June lows.

Another interesting thing is to compare the current moment to the June lows of around 3,600. Sentiment is back to the June levels, yet stocks are 10% higher.

More importantly, the fundamentals are much better with inflation in a much better place. And, the market and economy have absorbed 3 more months of tighter monetary policy but continue to show minimal damage in terms of consumer spending and employment.

Like I said in today’s trade alert, the much-ballyhooed soft landing scenario that seemed implausible when the Fed started its rate hikes is now quite plausible.

Fed vs Fundamentals

The major sticking point in the bullish case is not the economy or inflation or earnings. It’s the Fed.

They seem oblivious to evidence that inflation has peaked or the damage that a strong dollar is doing to the rest of the world (ROW) or the possibility that too tight monetary policy could create a bigger problem down the road.

In fact, they continue to focus on the need to bring down inflation as their primary focus. It’s fair to say that this market rally ended during FOMC Chair Powell’s Jackson Hole speech, where he continued to pound the table on the importance of fighting inflation.

And, the selling picked up steam as more FOMC members continued to send the same message.

That’s why I picked the above title. The fundamentals are trending in the right direction, but it doesn’t mean much if the Fed continues to aggressively raise rates.

According to a recent report from the WSJ, it plans to do exactly that with another 75 basis points hike at the upcoming meeting.

Inflation Front

I continue to see inflation as the biggest market issue at the moment.

Rising inflation crushes consumer confidence and will eventually erode profit margins (not to mention an even more hawkish Fed). On the other hand, falling inflation will (at some point) lead to relief on the rate front and be supportive of profit margins and earnings.

Everything I see is consistent with inflation collapsing at a pace that mirrors its rocket-like trajectory. Today, data showed that used car prices dropped 4% compared to last month. Gasoline prices are down 12% over the last month.

The housing market has cooled with some markets now seeing price drops. This presages relief in terms of rents which is another contributor to inflation.

Another area with a turnaround is freight prices which is now back to pre-pandemic levels, another positive, disinflationary force that should feed into all sorts of prices.

All in all, I’m comfortable saying that inflation has peaked and the worst is behind us.

What I’m less certain about is when the Fed will acknowledge this improving dynamic. And, when it will be sufficient for them to back off the accelerator.

Another uncertainty is whether the market will focus on the Fed or the improvement in fundamentals.

Today’s Trades

This logic informs today’s trades. The most likely way to resolve these dueling bullish and bearish impulses is through some sort of range-bound price action.

Positive news on the inflation front would take us to the top of the range around 4,300.

But, hawkish Fed chatter would take us back to 3,900. To get back to 3,600 (or lower), I think we would have to see inflationary pressures reignite or evidence of more significant damage to the economy and earnings.

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All the Best!

Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter

SPY shares were trading at $405.46 per share on Friday morning, up $5.08 (+1.27%). Year-to-date, SPY has declined -14.00%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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