Marc Cuniberti Inflation statistics are the gauge used by the Federal Reserve (the FED) when adjusting interest rates.
With some recent data showing a slowdown in the rate of inflation, investors are nibbling on stocks and it is the reason the markets have been rising as late. Obviously not an all-out, everybody-in market just yet, the recent strength has been encouraging.
This by no means is an indication all is well with the stock market however.
Keep in mind, the markets day to day movements are just the sum of the beliefs of all the market participants at a particular moment in time. The markets will always reflect reality eventually and therein lies the danger of taking clues from brief rallies and thinking the change in investor sentiment is permanent, when it may only be a brief enthusiastic blip.
Wall Street has a tendency to try and sniff out market turns in order to catch a rally, but rallies that signal an all-clear should be prolonged in this analyst’s opinion. They should also be supported by improving economic statistics as well as better news on the issues that were previously causing it to fall.
In the current 2022 market obliteration, investors have been mostly focused on inflation data and the Federal Reserve’s response to that data.
The question then becomes is inflation abating and will statistics continue to show improvement.
There are many landmines that threaten the brief spike in the recent encouraging inflation statistics that could spell more problems for the markets.
The coming spike in diesel fuel and the possible railroad strike would both likely fuel more inflation.
More government spending programs, should they be announced, would mean even more money printing. Many analysts, including this one, believe most of the inflation we are currently seeing is directly tied to the massive amount of government spending to address CoVid-19 in the last two years.
In more dire news, two large real estate funds have recently limited investor redemptions, meaning some investors may not be able to withdraw all their money.
This is a liquidity issue, similar to what we are also seeing in the current FTX crypto fiasco. A similar liquidity event occurred in 2008 with two Merrill Lynch real estate funds and that helped start the infamous 2008/09 real estate blow up. Liquidity issues are serious events that can spread to other areas of the market and have a domino effect leading to problems with other financial firms.
The latest jobs report adding to the inflation concern showed a hotter than expected labor market which flies in the face of what the Federal Reserve is trying to accomplish. This statistic demonstrates that at least some areas of the economy are not responding to the recent rate hikes by the FED and a more aggressive Fed could continue to pressure stocks.
Indeed after the labor statistic came out last week, the markets sold off hard, with the Dow down over 800 points on the week.
Only time will tell if the markets will retest the lows of the year which occurred in late September for most of the indexes. For 2023 to be a better year than 2022, which was mostly horrendous, inflation has to steadily come down to more reasonable levels. Although it may likely be years before inflation once again hits the Feds desired level of around 2% annually, a strong move toward that goal might mean the market can start to show investors a little bit more green then it has in 2022, which by the way, was very little.
“Watching the markets so you don’t have to”
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This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249. His website is moneymanagementradio.com, and was recently voted Best Financial Advisor in Nevada County. 530-559-1214.
