In today’s briefing:
- Just A Flesh Wound, or A Deep Cut?
- “Price Leads Fundamentals”, Or “Don’t Fight the Fed”?
- Supply-Side Developments Raise the Spectre of Structurally Higher Inflation
Just A Flesh Wound, or A Deep Cut?
- The S&P 500 has paused its advance after a breadth thrust, but not all breadth thrusts are the same.
- To be sure, most breadth thrusts have strong bullish implications. But this time may be different.
- A variety of market internals indicates that the pause is likely to resolve in a deeper pullback rather than a more benign sideways consolidation.
“Price Leads Fundamentals”, Or “Don’t Fight the Fed”?
- A wide gulf is opening between technical analysts, who are bullish, and macro analysts, who are bearish. A study of past major bear market bottoms suggests two possibilities.
- The benign outcome will see the market undergo some choppiness for several months in the manner of the 2010 and 2011 bottom.
- The more bearish scenario calls for a second leg down in the manner of the post-9/11 rally as the full effects of the recession reach culmination.
Supply-Side Developments Raise the Spectre of Structurally Higher Inflation
- Poor productivity and rising unit labour costs since 2021 Q4 have raised the ante on companies to increase selling prices in order to preserve operating margins.
- The current environment presents the Fed with an opportunity to wrest control of setting US financial conditions by remaining focussed on restoring price stability.
- Geopolitical tensions have raised inflation pressures via food and energy supply disruptions, while China’s future willingness to satiate Western consumer demand at any cost should be questioned.
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