October 14, 2022
It is easy to get lulled into a false sense of understanding when trying to manage investment, but yesterday’s financial markets were truly record setting. Lots of other outlets are reporting the enormity of the move, but the underlying issues are the focus here. To start though, a little bit of Chris Farley comes to mind.
There is an adage that investors have to be in the market to take advantage of the best days to get the returns. In the next month or so, I hope to have some time to repeat that research and pour some cold water on it. Yesterday however brings that adage back into focus.
In the morning the CPI number was released (inflation reading) and it was above expectations. That knocked futures down hard in the morning, and the market opened sharply lower. Then buyers stepped in and pushed the market up to one of the market’s best days in two years. The total range (over 5%) was the best one day turnaround ever. The thinking is that it was buying by short sellers to cover their positions. It is hard to know until more data is available.
The question is . . . “Is it safe to invest now”? The media is abuzz with this question after such a powerful move. Unfortunately this turn comes with a couple of other important events.
First and foremost, is to recall that the race higher at the beginning of this month was elicited when markets thought that the UK was going to ‘pivot’ and cut taxes, return to quantitative easing and that the process would spread. Then the market was thrown into turmoil when the Bank of England had to step in to avoid a complete collapse of the UK financial system. This morning the new UK finance minister was forced to resign and it looks like a pivot will take place. It is a pivot towards austerity unfortunately, but it will reduce the chances of financial meltdown and bring the UK back in line with a global push to reduce debts, increase taxes and normalize monetary policy.
At the same time, the increase in inflation spells trouble for those who are hoping that the US Federal Reserve will pivot and slow rates hikes or even ease rates to reduce the economic pain that is well underway. That inflation reading should encourage the Federal Reserve to maintain their course and possibly even act faster to bring inflation down.
Overall, there is a possibility that markets stabilize or even rise from this level due to decent earnings in the current quarter. Unfortunately the price pressures caused by inflation are going to impact consumers and businesses. The rising interest rates are going to harm consumers and corporations, particularly those with heavy debt loads. The economy will slow down and profits will take a breather or decline.
For traders, there may be an opportunity to buy into this bounce. If there are two days (Friday, Monday) of follow-on strength, that would add confidence. However the pain from higher rates, declining assets are still to come and there are very clear stresses in the system around the world. These could cause markets to barrel downward just as fast. Standing aside during this turmoil is the safest option, even if it isn’t enriching.