Where Are We?

The better emerging technical indicators we were seeing in stock market action have been overridden by the Federal Reserve and inflation. At the beginning of the current monetary tightening cycle, the Fed signaled that it wanted to preserve the progress it had made in promoting full employment while at the same time, in a measured way, begin fighting inflation. With the recent CPI data exceeding expectations and its subsequent increase of ¾ of a percent in the fed-funds rate, the Fed announced that it is now prioritizing inflation over employment and the economy.

Remember, the Federal Reserve has the dual mandate to seek both full employment and low inflation. Now, it realizes that both may not be possible. Demand must be reduced to bring inflation back into line. That entails using the blunt tool of higher interest rates to slow everything down.

The stock market has already adjusted, to a great extent, to this possibility. The economy may slow much faster than many have expected. High prices, along with higher interest rates, are already affecting growth. Expect more slowing soon. Realizing that much of the economic adjustment may have already been done, investors position themselves for eventual recovery. This usually happens as much as six to nine months before the actual evidence emerges. Hopefully, we are not too far from that. Stay steady my friends.

The Lonely Bull