August 17, 2023

Let’s Start Here

 It’s been over a week since my last comments, and the correction I’ve been waiting patiently for has arrived and taken the broad indexes in more interesting territory. Namely, the said indexes are no longer over bought, but they also aren’t yet oversold, but they’re getting there. So, what happened?


In the past two weeks the economic data showed an economy stronger than the Federal Reserve probably wants. Starting with both inflation indicators (CPI, PPI) came in slightly higher than estimates, and that started to rattle some nerves. Then this week, Retail Sales came in for the month up .07%, higher when previous months were revised higher, and all over estimates. Housing Starts came in for the month up 3.9%, bringing the year to 5.9%. And this week the Federal Reserved released their opinions of economic growth and theses numbers prove their concern of a strong economy, and subsequent concern over the potential impact over inflation.


The first change came from the long end of the Treasury Bond market. Starting last week, the 10yr Treasury was 3.98%, this week it currently trades at 4.31%, these are moves that our AI buddies don’t miss, and the natural move for the broad indexes is to move lower in response. Naturally, all this has been helped along by the pundit narrative. As of today, the technical condition of the indexes has improved to the point that reasons to buy are becoming plausible.


The reason come in two packages. First, is that economic growth will always have a degree of inflation following it.  For the last 60 years inflation has moved around a lot, but on average has been around 3%. This, in my opinion is a far better goal than the 2% pushed by the Fed. But the point is that inflation has improved, will continue to show improvement as the Fed continues to raise interest rates and even if the economy at worst, slows down and avoids recession, which is also a plausible argument in my opinion, these are events that the markets like.

 Bears will continue to battle Bulls, but the current correction has exceeded 5% for the NASDAQ and that’s typical. As new data is released, comments from the Fed voters become public, Washington stays out of trouble and interest rates get tired of moving higher, the markets will pay attention to the clues of the future. That’s because markets are forward looking, and from my point view, the horizon looks more promising each day.

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