Inflation Concerns to Battle With the AI Growth Narrative
Here’s my strategy with AI bubble worries now competing with a Fed preparing for potential rate hikes.
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After selling off on the Federal Reserve interest rate policy decision on Wednesday afternoon, stocks are rebounding on Thursday. President Trump signed the 14-point MOU with Iran and that is helping to push oil lower for the sixth straight session.
Lower oil is reducing some of the concerns about inflation, but Fed Chair Kevin Warsh made it clear that there is more to monetary policy decisions than just the cost of energy. His signal that he is determined to deal with the inflation issue was the primary catalyst for a late-day selloff.
Jeffrey Gundlach appeared on CNBC after the Fed decision and his headline was “Forget AI, Fed Is The Story Now.” He said Warsh faces “a 1970s-style inflation challenge.”
Gundlach, who is known as the “Bond King,” tends to have a negative bias on equities but he is embracing this new market narrative. The AI bubble worry that created recent volatility is now competing with a Fed that is openly preparing for potential rate hikes.
The Warsh Message Was Not New
Despite the market reaction, Warsh didn’t say anything new or surprising. There was hope he might make a few dovish comments but no one was expecting a rate cut or even the promise of one in the near term. The market and the economy are likely better off in the long run if there is a focus on dealing with inflation rather than rate cuts, which would feel good in the short term but won’t fix the problems with prices.
The question now is whether the market can rebound from the Fed upset and keep running. The good news is that even with the selloff on Wednesday there was some strong speculative action and stock-picking was working well.
There is rotational action taking place and that is where the opportunity lies. Money moved out of the Magnificent Seven (MAGS) again but this group also tends to have a reflexive bounce after an ugly day.
I will be watching carefully for pockets of speculative action. As I’ve been writing, I have raised my cash levels significantly and am playing strong defense but there have been more opportunities in individual stocks than I anticipated. It was a good day for biotechnology and some small-caps on Wednesday even though the indexes looked bleak.
Strategy
My best advice is to not worry too much about the indexes and stay focused on the rotational action. It may be short-term movement but that is where the trading opportunities lie. Stay selective, trade tightly, and be aware of your time frames.
Thursday is triple-witching option expiration, which will add to volatility, and don’t forget that the market is closed on Friday for Juneteenth.
At the time of publication, Rev Shark had no positions in any securities mentioned.
