We are all familiar with the adage concerning making assumptions, however, assumptions were plentiful on Wall Street this week. Let’s take a look at some.
Tuesday saw midterm election results which have raised the possibility of a split congress (we won’t even touch on the assumptions that a Red Wave was forming prior). Because of this division, many investors assume this is a good thing for the market with the thought that the pullback in stimulus means less inflation pressure. This assumption would result in a slowdown on the Federal Reserve’s part regarding interest rate increases. This assumption means less pressure on the equity markets.
Consumer Price Index (CPI)
The Consumer Price Index (CPI) came in cooler than expected and investors assume that the Fed may ease up on rate hikes sooner than later. In the impressive rally, we saw this last week, assumptions were not only at the forefront but were the reason!
Latest Inflation Figure
The latest inflation figure of 7.7% was a bit lower than the previous rate of 8%+ however the Fed is still expected to raise rates in December by ‘only’ ½ %. As the Feds continue to see inflation as public enemy number one, look for their aggressive moves to continue.
Taking into account last week's market rally, our numbers continue to signal this as a ‘Bear-market rally’ albeit a strong one. Aggressive interest rate increases have, and will continue to have, a painful effect not only on the average American household and businesses but also on the overall economy.
Market Continues to Remain Down
Stocks traditionally do well after midterm elections and despite our observation of last week’s upswing, the trend of the market continues to remain down. It would not be surprising to see a year-end rally as well. This of course would be welcome news to retailers this upcoming holiday season.
Home Buyer Sentiment
Increasing mortgage rates will continue to scare away home buyers which have caused demand to drop to their lowest levels in 25 years. According to Fannie Mae, home buyer sentiment has hit the lowest point since they created the ‘Home Purchase Sentiment’ (HPS) in 2011. This index (which we also track) was down in October for the eighth time in a row. Home mortgage rates are at a national average of @7.3% which is double from this time last year.
We’ll have more to say in the next few days, but by following many broad indicators and indexes the Market Trend remains bearish causing us to continue to advise remaining in a cash (money market) position. Look for a reversal in this current trend when the S&P 500 dips to @3,300.