Peak Inflation? It’s been a whipsaw November. Early on the Federal Reserve delivered a fourth consecutive 75-basis-point interest rate hike, sinking the markets. Then on November 10, the Consumer Price Index showed the rate of annual price gains slipping to 7.7% in October, down from 8.2% the previous month.
And the crowds roared.
The CPI report gave investors hope that inflation is now past its peak, lending confidence that the Fed’s interest rate hikes are slowly working to tame high price increases. A slowing inflation rate doesn’t portend a Fed pivot, but it does give the U.S. central bank license to take their foot off the throttle.
And the crowds roared.
The CPI report gave investors hope that inflation is now past its peak, lending confidence that the Fed’s interest rate hikes are slowly working to tame high price increases. A slowing inflation rate doesn’t portend a Fed pivot, but it does give the U.S. central bank license to take their foot off the throttle.
Such a slowdown is now widely expected; a half a point hike in December, and perhaps, perhaps come off the tightening autopilot early in 2023.
Further supporting that scenario, payroll numbers this morning indicate that private companies added just 127,000 positions for the month, well below the 190,000 consensus estimate from economists. In other words, the job market may be cooling as a result of recent rate increases – exactly the result the Fed has been looking for.
Soft Landing?
Does this mean there still a chance for a so-called “soft landing,” a moderate economic slowdown as opposed to a full-blown recession? Sure. It’s a long shot, but maybe – assuming rates don’t need to go as high as previously thought.
But the safe bet is to keep our enthusiasm in check in case this is another false dawn. It is, after all, the numbers from just one month, and one inflation print could be noise. As the San Francisco Fed’s Mary Daly said on the day of that print: “One month of data does not a victory make.”
Besides, the rest of the world isn’t exactly cooperating. There remains an active war on the other side of the world. China, the world’s second largest economy, is in turmoil with mass protests and resultant crackdowns. Kinks in the supply chain which had been mostly ironed out are now at risk of re-forming.
The S&P 500 remains down almost -16% YTD; the Nasdaq down -29% for the year.
Santa Claus Rally. Really?
U.S. equities typically rally during the month of December. Since 1950, the S&P 500 has gained an average of 1.3% during the seven-day period leading up to December 25, and it's gained in 34 of the past 45 years
But this year has been anything but typical.
“Investors tend to be optimistic going into the new year but this is still the Fed’s market,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
With all due respect to Mr. Jacobsen, we learned in childhood that Santa can chart a course in even the most turbulent conditions. Keep the light on.
And For What It’s Worth…
A resident of remote, sparsely populated Nevada County in California had his home destroyed by a meteorite. "I heard a big bang. I started to smell smoke. I went onto my porch, and it was completely engulfed in flames," said local rancher Dustin Procita.
Locals reported seeing a bright ball fall from the sky and land in the same area as Procita's home. Some of the sightings were recorded on video.
The chances of losing one’s house to a meteorite are astronomically slim. "They say it's a one in four trillion chance,” shrugged the rancher. With a new found perspective on long-shot odds, he adds, “I guess I might be buying a lottery ticket today."
Further supporting that scenario, payroll numbers this morning indicate that private companies added just 127,000 positions for the month, well below the 190,000 consensus estimate from economists. In other words, the job market may be cooling as a result of recent rate increases – exactly the result the Fed has been looking for.
Soft Landing?
Does this mean there still a chance for a so-called “soft landing,” a moderate economic slowdown as opposed to a full-blown recession? Sure. It’s a long shot, but maybe – assuming rates don’t need to go as high as previously thought.
But the safe bet is to keep our enthusiasm in check in case this is another false dawn. It is, after all, the numbers from just one month, and one inflation print could be noise. As the San Francisco Fed’s Mary Daly said on the day of that print: “One month of data does not a victory make.”
Besides, the rest of the world isn’t exactly cooperating. There remains an active war on the other side of the world. China, the world’s second largest economy, is in turmoil with mass protests and resultant crackdowns. Kinks in the supply chain which had been mostly ironed out are now at risk of re-forming.
The S&P 500 remains down almost -16% YTD; the Nasdaq down -29% for the year.
Santa Claus Rally. Really?
U.S. equities typically rally during the month of December. Since 1950, the S&P 500 has gained an average of 1.3% during the seven-day period leading up to December 25, and it's gained in 34 of the past 45 years
But this year has been anything but typical.
“Investors tend to be optimistic going into the new year but this is still the Fed’s market,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
With all due respect to Mr. Jacobsen, we learned in childhood that Santa can chart a course in even the most turbulent conditions. Keep the light on.
And For What It’s Worth…
A resident of remote, sparsely populated Nevada County in California had his home destroyed by a meteorite. "I heard a big bang. I started to smell smoke. I went onto my porch, and it was completely engulfed in flames," said local rancher Dustin Procita.
Locals reported seeing a bright ball fall from the sky and land in the same area as Procita's home. Some of the sightings were recorded on video.
The chances of losing one’s house to a meteorite are astronomically slim. "They say it's a one in four trillion chance,” shrugged the rancher. With a new found perspective on long-shot odds, he adds, “I guess I might be buying a lottery ticket today."
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember - especially now - that protection* remains paramount.
Best always,
David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can also mean a significant position in a model built for protection. For example, the new Zen Knuckle with its volatility hedge. Or Bond Bulls and/or The 12% Solution, as they both have sensitive cash triggers, and can switch between different bond funds.
It can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or the new Zen Knuckle and pretty much anything else.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Protection can mean keeping an eye on the provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management. Read more on the Investopedia page for Stop-Loss Orders.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember - especially now - that protection* remains paramount.
Best always,
David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can also mean a significant position in a model built for protection. For example, the new Zen Knuckle with its volatility hedge. Or Bond Bulls and/or The 12% Solution, as they both have sensitive cash triggers, and can switch between different bond funds.
It can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or the new Zen Knuckle and pretty much anything else.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Protection can mean keeping an eye on the provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management. Read more on the Investopedia page for Stop-Loss Orders.
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