March 4, 2021

The Current Correction

 The current technical condition of the market at my last weekly update was that it was growing less overbought. This week, on the back of rising interest rates and growing fears of inflation, at odds with Chairman Powell’s more temperate outlook, the broad indexes, led by the Nasdaq, moved lower. Now the technical condition of the broad indexes is in oversold territory and therein lies the question. Are we done yet?

    Technical analysis doesn’t give us buy signal, it only reflets the breadth of a rise or decline in the broad indexes. As well, historical tendencies for the indexes to correct after a long period of rallying is also worth noting. On average I expect the indexes will generally correct by 5% a few times a year, 10% every two years and 20% every three years.  Now a correction of 20% has happened last year, nearly three years after the last correction of 20% which occurred in the last quarter of 2015 into the first quarter of 2016.

    But it’s worth noting that the correction last spring wasn’t either economically induced, or rate sensitivity induced, but from a reaction to a once in lifetime national lockdown. That brings us to the correction that’s occurring now. The concerns of inflation are evident in the recent Consumer price index (CPI) and Producer Price Index (PPI) which rose 0.4% and 1.3% respectively, with PPI rising the fastest since 2009. As a general rule I tend to see past traditional CPI a tad misleading. Because it removes food and energy from the final data I think the since the consumer is the largest portion of GDP, those two areas are important to the final numbers. So, I focus on the Employment Cost Index, that represents real average weekly earnings, which are up 4.9% in the past year. Add to that the coming stimulus and inflation becomes a genuine concern.

    However, that concern, as dispersed by the media, focuses on the intensity of the rise in inflation at the expense of the longer term implications of what could be a short lived spike. As confirmed today, the Fed is, at worst, expecting the latter. Which, in my opinion, means no rate hikes to confirm the recent rise in Treasury rates. With that in mid, patience is a still a virtue, but so is action. Portfolios have lower exposure to fixed income than traditional bond rates would invite, and cash is available for adding to new and existing holdings that are expected to respond favorably as the country becomes more vaccinated and the economy shows more vigor. 

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