Nothing like confusing market action to send people into narrative creation overdrive. Yesterday’s 2% drop in expected CPI data, followed by a ~5% recovery to end the day is a perfect example of random market action of more than 2% that creates endless interpretations.
What was the takeaway from CPI? Look at the BAML chart above: The core product is coming down (It’s good!), but core services are still growing (It’s bad!) rents are about half of the CPI (and mostly services), so consider alternative rent measures — they show it’s not as hot as officially reported (Which is good!) unless the Fed ignores it (which is bad?)
Perhaps this explains why the data was so confusing; No wonder we had so many post-event explanations:
-The market returned 50% of the covid assembly, a key technical support;
– The strong dollar is making imports much cheaper;
-Owner Equity Rent (OER) is creating a misleading measure of service inflation;
-The Fed is showing signs of pivoting;
– Program trading is downward trending
-The decline in residential real estate is happening faster than expected
-It is already priced in the market.
I don’t mean to suggest that any of these explanations are wrong – they could all be right! But rather, I want to point out that they were as true before yesterday’s reversal as they were after. It is a matter of reason, not understanding.
The simple fact is that people prefer descriptive accounts of what happened regardless of accuracy; Arguably, we are more comfortable with these than accepting that the universe is random. “Sometimes, the market goes crazy!” is not an explanation that anyone likes. . . .
Where does that leave investors today?
Some market bottoms are a process, the blind grasping of different market participants with different risk tolerances, financial goals and time horizons.
Capitulation is a term used to describe a variety of downsides when we see the end of a secular bear market: overwhelming strong selling of everything. However, more cyclical bear markets tend to be downtrends that occur over time as sentiment changes and new information plays into the psychology of traders. I think a range and a point less than full-on surrender to secular, generational inferiority.
It’s absurd, more art than science.
Bad news is good news (Batnick, October 14, 2022)
September Consumer Inflation: Fictitious “OER” Plus New Cars (Bond Dad, Oct 13, 2022)
in the past:
7th Inning Stretch (September 30, 2022)
Counter trend? (August 15, 2022)
Hindsight Capital (April 27, 2022)
One-sided Market (September 29, 2021)
The end of the secular bull? Not So Fast (April 3, 2020)