Some Day My Prints Will Come

Sep 12, 2022

By Pete Biebel, Senior Vice President

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Once upon a time in a fantasy land far, far away, the leaders of the realm wanted to spur the economy. Lacking fairy dust, they resorted to bestowing the citizens with free money. At first, they allowed borrowing with little or no interest expense. Not surprisingly, the prices for everything from coal to cattle to castles began to increase. The kingdom’s stock market soared to record highs. But just when everything was humming along, a great plague suddenly befell the country. The economy was teetering on recession. Having already exhausted their interest rate magic, the rulers chose to become fairy godmothers; they simply gave money to the citizens. And they lived happily ever after.

Well, sorta. In reality, years of free money eventually caused a larger and broader spike in inflation, putting a damper on the fairy-tale ending. In our world, the Fed, with help from generous fiscal policy, had backed itself into a predicament that couldn’t be resolved with a magic spell or a kiss from a prince. The resultant policies of hiking its target Fed Funds rate and speeding up the rate at which it unwinds its swollen balance sheet, have understandably put a curse on our stock market. Higher interest rates in a potentially slowing economy have been the poison apple that put the market into a deep sleep so far this year.

All good fairy tales have some scary stretches, usually involving an ogre or a big bad wolf. Investors have had no choice but to accept this year’s scary plotline and wonder how much worse things might get before they begin to get better. However, more recently, with signs that inflation may be receding, it seems that investors are beginning to believe that the worst of the scary part has passed, and their focus is now shifting to watching for the beginning of the happy ending.

History has shown consistently positive market performance in the months following the Fed’s final rate hike in a cycle. The prevailing theory seems to be that the stock market will print its low before the Fed pivots its policy and begins to reduce its target rate. Therefore, if inflation continues to subside, and if the Fed is likely to pivot on its hiking policy sometime late this year or early next year, then the major averages will likely print their lows late this year if they haven’t already done so. I get the distinct impression that many investors are patiently sitting on sideline cash, waiting for those prints to come.

One reason for that impression is that the most recent survey from the American Association of Individual Investors showed a big decrease in bullishness and a big increase in bearishness. The net percentage (% Bulls minus % Bears) was negative 35.2%, near its lowest level of the year and at a level that was the low end of the range for most of the past 10 years. That skew may have been tempered somewhat by the market’s strength late last week.

Backing up that impression was a report on Friday from Bank of America stating that investor sentiment had declined to extremely negative levels. Their gauge of investor sentiment, based on a variety of factors, has fallen to a level that indicates very oversold markets.

Last week, the market was able to shake off whatever spell it had recently been under. Following the market’s rebound peak in mid-August, the major averages fell into a funk, posting three consecutive weekly losses coming into the Labor Day weekend. After absorbing a small loss on Tuesday, the averages charged higher through the last three sessions of the week. The NASDAQ Composite was the most enchanted of the indices, gaining a little over 4% for the week. The S&P 500 Index (SPX) levitated 3.65% and the Dow Jones Industrial Average rose 2.66%. The Consumer Discretionary sector led all others, gaining nearly 6%, led by big gains in several of the cruise ship stocks.

The next two weeks should reveal a lot about the market’s bias leading into the midterm elections. This week, we’ll see how it reacts to the CPI and PPI data. Next week we’ll get the official policy statement following the Federal Open Market Committee meeting on Tuesday and Wednesday. But the final two weeks of September have been historically the weakest part of the weakest month. If this week’s reports indicate worsening inflation, then markets are not likely to react favorably. Indications of moderating inflation, especially if they are subsequently acknowledged with less hawkish rhetoric from the Fed, would be the idyllic outcome.

We’ll find out early this week what sort of upside follow-through the averages can tack on after the big gains last week. SPX should easily climb into the 4075 – 4125 range. Progress beyond that area would be very encouraging. The bulls will be hoping stocks can ignore their seasonal tendency and continue climbing through late September. If SPX can add another 5% to 6% and rally beyond the 4300 level, that would be a loud-and-clear signal that the June lows will probably not be retested.

In the first two sessions last week, SPX held at the 3900 level, just as it had in the final two sessions of the previous week. Those four consecutive lows very near that level are a loud-and-clear signal that 3900 has become a critical level for SPX. Sustained trading below that level would very likely be followed by a spike in volatility and an acceleration lower.

As mentioned above, the inflation data on Tuesday and Wednesday will be the key economic reports this week. Analysts expect a 0.1% decline in overall CPI, largely as a result of a big decrease in the price of gasoline. Core CPI, which excludes food and energy components, is expected to have increased 0.3% in August, leading to a slight increase in the year-over-year rate to 6.1% from 5.9%. Expectations for PPI are just the opposite: The consensus is for a smaller decline in the monthly number and a large decline in the year-over-year core rate.

Date Report Previous Consensus
Monday 9/12/2022 No Reports Scheduled
Tuesday 9/13/2022 NFIB Small Business Optimism Index, August 89.9 90.5
Consumer Price Index, August, M/M 0.0% -0.1%
CPI ex-Food & Energy, August, M/M +0.3% +0.3%
CPI ex-Food & Energy, August, Y/Y +5.9% +6.1%
Wednesday 9/14/2022 Producer Price Index, August, M/M -0.5% -0.1%
PPI ex-Food & Energy, August, M/M +0.2% +0.3%
PPI ex-Food & Energy, August, Y/Y +7.6% +7.0%
Thursday 9/15/2022 Initial Jobless Claims 222K 227K
Continuing Claims 1,473K 1,478K
Philadelphia Fed Manufacturing Index, September 6.2 3.5
Retail Sales, August, M/M 0.0% 0.0%
Retail Sales ex Vehicles & Gas, August, M/M +0.7% +0.4%
Empire State Manufacturing Index, September -31.3 -14.5
Import Prices, August, M/M -1.4% -1.3%
Export Prices, August, M/M -3.3% -1.2%
Industrial Production, August, M/M +0.6% +0.2%
Business Inventories, July, M/M +1.4% +0.6%
Friday 9/16/2022 Consumer Sentiment, September 58.2 59.9
Quadruple Expiration – Stock & Index, Options & Futures


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