July 13, 2023

Residual Uncertainties

 This week saw the release of inflation data, both production prices and consumer prices. Both showed modestly lower results than the consensus expected. Good news for the markets, to be sure, but I welcome doubt as a crucial endeavor in researching a predictable outcome. That’s because the markets are never finished, the evidence of inflation moving lower is persuasive, but my preferred approach is as written about often, what are the residual uncertainties? My top three are, in my opinion, the same the markets will listen to.

Economic Data

The data is evident of the present, but is it evidence of the future? One economist that I follow with respect has pointed to the year over year inflation data which is currently being compared to June 2022, when the data show the highest level Consumer Inflation (CPI) reached, 8.93%. By October, the level was 7.76% and has slowly dropped in line with the decline in Money Supply which has been modestly rising since April 2023. This raises an uncertainty, will the year over year data be less visually persuasive as year over year inflation data narrows? And will the rise in M2 along with recent seasonal increases in energy prices further stall the good news? In my opinion, inflation is coming down, but the Fed is the final word on that, and I’m not convinced they’re finished.


Earnings begin this week and will bring their customary bundle of uncertainties. The goal of the Fed has been to slow the economy and the recent strength of the broad indexes has suggested strengthening growth in earnings. I’ve often found this to be a curious dilemma, this is because over the past 5 years analysts have consistently taken both sides to the outcome. Namely, downgrade a stock from a buy, but raise the target price. This leaves the companies reporting to deliver numbers that will have little comparison to analyst predictions. Where the analysts have no prediction is what the CEO’s future guidance contains, which for the last three quarters has been cautious. This is what I’ll be watching for.

 External Events

In the past few weeks two events have caught my attention. The first is the Supreme Court decision to  deny the administration student debt relief package, estimated to cost the government $30 Billion a year, for ten years. Worth noting is student debt is currently on a Loan Freeze, begun during the pandemic and set to expire in October 2023. At that time, watching the changes in consumer spending, which could affect the outcome of discretionary capital by going to the government instead of the Mall. Consumer spending has seen slight moderation since 2021, and as school starts, post labor day work normalcy arrives, travel seasonally slows, the economy could see further signs of slowing that have been stubbornly elusive. Lastly, I found the addition of Sweden into NATO, and the suggestion that Ukraine is next, is probably sending a strong picture to those outside the tribe. No reason to draw conclusions, but worth paying attention to.

Some may suggest I’m being contrarian, not the first time, I was somewhat contrarian last October too. But, the current technical condition of the broad indexes, especially the Nasdaq, are overbought. This doesn’t mean the broad indexes can’t move higher, it only means, in my experience, that when markets reach this level of overbought conditions, they never stay there. What’s the trigger? I’ don’t know, I just stay the course, don’t chase the markets, and remain ready to respond when the markets come to us.

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