I wrote this commentary for Reitmeister Total Return members Thursday after the lower than expected CPI report caused a shocking surge for stock prices.

However, I realize this is an important message for all investors to hear as not to get sucked into another bear market rally before stocks tumble once again. Here is that commentary in full:

“My wife and I got up at 3:30am this morning to catch an early flight to Phoenix. Grand Canyon today. Wedding of 2^nd cousin and other family events in Phoenix tomorrow and Saturday.

I happily got into vacation mode by turning off my phone. Thus, I didn’t learn about the CPI report and the big rally until I arrived in Phoenix.

My first reaction was laughter. That traders once again overreact to things they don’t fully understand.

Kind of like how the market (SPY) rallied 2% minutes after the Fed announcement came out last week only to fall 3.5% from there into the finish line when Powell shared details on the “pain train” that is still heading our way.

Now let’s take it from the top. The target rate for inflation is 2% or less.

So let’s imagine that this report proves that inflation has peaked (which may or may not be true). Hooray. We are now at 7.7% even after 6 straight rate hikes.  But the inflation target once again is 2%.

Do you really think the Fed’s job is now done?

They told you just a week ago that this is a long term battle with inflation. With previous statements of not lowering rates through the end of 2023. And that the window to create a soft landing is narrowed.

Their goal is to weaken the economy which lowers demand. And if you have same supply and lower demand, then you have lower prices.

These are serious academics that appreciate this is a long term process. Not an Easy Button. And just because inflation may have peaked doesn’t mean a smooth ride down to 2%.

NOTHING from the Fed announcement last week has truly changed. Just the sum total of 6 rate hikes “may” have led to inflation peaking. But the battle to get to stable 2% inflation is FAR from over.

As we have seen already there are many rallies during a bear market. Many arising from nothing more than people getting tired from selling. However, I agree that today’s CPI report is as good of a reason to have another bear market rally before people wake up and smell the pain once again.

I suspect that this catalyst maybe has upside to around the 200 day moving average (long term trend line) at 4,082. Maybe even falls apart before that at 4,000. Yet there is nothing here that makes we want to join the bull party.

Again, I have an economics degree which helps me better understand the way the Fed works. And why NOTHING has changed from the very serious statements they said just a week ago.

Reity, is it possible that the bear market is over?

Yes possible. Just not probable.

Possible because economics is an inexact science and crazy things can happen. Meaning that the lowering of inflation could come together faster than expected. Not as fast as today’s rally would imply. But sooner than previously understood and 25% peak to valley decline for S&P 500 (SPY) could be good enough.

However, for all the reasons stated since I got bearish in May…and for all the reasons expressed again and again in recent commentary. And especially knowing the very nature of the people who run the Fed…they are not impressed.

7.7% inflation does not equal 2% no matter what kind of fun house mirror you want to use. 

At best the recession will be shallower than expected. At worst, inflation is still too sticky and will need more Fed rate hikes + more Quantitative Tightening + more time leading to deeper recession > lower corporate earnings > lower share prices.

My bet remains with the latter. But very willing to keep watching the data and changing my tune if miraculously inflation can rectify before the economy tanks.”

11/15/22 Update: I just want to add to the above that these sentiments were echoed by Fed Governor Waller over the weekend. Here are some of his key quotes that should reinforce that the Fed is still very much on the war path to crush inflation and that likely still includes pain for the economy and further stock price downside:

“The market seems to have gotten way out in front over this one CPI report. Everybody should just take a deep breath, calm down. We’re going to see a continued run of this kind of behavior and inflation slowly starting to come down, before we really start thinking about taking our foot off the brakes here. We’ve got a long, long way to go…Rates are going to keep going up and they are going to stay high for a while until we see this inflation get down closer to our target (2%…not 7.7%).”

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Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return

SPY shares . Year-to-date, SPY has declined -15.85%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...

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