Market rallies are common heading into year-end, and this rally is no different. However, we are now reaching more extreme levels of typical reflexive rallies, and a consolidation or correction to support should be expected.
Mr. Powell heard our concerns, and on Thursday, he responded to the recent loosening of financial conditions. As discussed below, the recent drop in bond rates and surge in the stock market works against the Fed's goal of tightening monetary conditions. The Fed's goal remains "tighter" conditions to reduce consumer spending and increase unemployment to reduce economic demand. The demand reduction is how inflation, which is solely a function of supply and demand, gets reduced.
On Wednesday, Jerome Powell's speech sparked a broad rally in stocks and bonds as market expectations for further rate hikes collapsed. There was nothing new about the Fed's recent policy announcement as they maintained that higher Treasury yields are doing their work in slowing economic activity and, ultimately, inflation. However, they did, again, as expected, leave open the possibility of further rate hikes as needed.
Possibilities and probabilities are currently difficult to evaluate. The drubbing the market took this week was undoubtedly disappointing. However, the market is approaching deep oversold conditions with some minor support heading into next week. Since March, whenever the market reached such oversold levels, a reflexive rally has ensued.
As we will discuss, the conflict with Israel took center stage this past week. However, the markets also had to deal with PPI, CPI, and the official kick-off of earnings season. From a market trading update perspective, let's start with a review from last week.
The market fell sharply in what felt more like a liquidation event early in the week. The market failed to hold that initial support level and quickly tested the 200-DMA as expected. The good news is the market bounced sharply off support levels on Friday, reducing the MACD "sell signal." If the market can follow through on this rally early next week, we could see a "buy signal" triggered.
The market took a hit this week as the Fed projections of "higher for longer" killed the "rate cut hopes." However, while there was much handwringing and teeth-gnashing over the decline, it was normal within any given year.
Since the beginning of the year, P/E ratios have risen along with interest rates. Such should be a concern for investors going forward. However, before we delve into that topic, let's review the market action from this past week.
There was a lot of chatter this past week about the most recent oil price inflation and interest rates. This week, we will dig into higher oil prices, inflation, and the link between interest rates and the economy. However, before we delve into that topic, it was a sloppy first week of trading to start September.