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.
While financial conditions remain tight, economic data supports the bullish narrative of "hope." That narrative is "hope" the Fed will cease hiking rates. "Hope" that the economy will avoid a recession, and "hope" that earnings growth will accelerate into 2024.
An economic downturn remains one of the most significant risks to the stock market, along with interest rates. However, on Friday, Jerome Powell spoke from the Jackson Hole Summit. He delivered, as expected, a "down the middle" speech suggesting the Fed will remain focused on incoming data for any upcoming policy changes. Over the last several years, market reactions to Jackson Hole Summit speeches have been relatively normal, with the exceptions of 2019 and 2022.
This week we will discuss why I doubled my bond position in my personal account. That may seem odd, given that rates have continued to tick up this past week. Much of the recent increase was related to a knee-jerk reaction to the July FOMC minutes, which failed to show signs of an aggressive timeline to cut rates. Notably, the rate uptick only improved the fundamental backdrop of bonds versus stocks.