Soft-Landing Scenario Gains Strength as Market Assesses Inflation Data
It's a tough environment for stock pickers trying to put cash to work, but folks focused on the indexes are celebrating.
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Last week, there was fear that a half-point Fed rate cut would trigger a sell-the-news market reaction. The thinking was that a rate cut of 50 basis points was a tacit admission that the economy was slowing and that the Fed was behind the curve and needed to act quickly to avoid a recession.
Recession fears have evaporated this week, however, as the market has gained confidence that the Fed has indeed engineered a soft economic landing. The argument for a Goldilocks outcome has been bolstered by massive economic stimulus in China and lower-than-expected inflation in Europe.
On Friday morning, investors are looking for another piece in the puzzle from the PCE inflation data. It is largely anticipated to be benign, and to confirm further that the Fed has inflation well under control and hasn’t done any significant damage to the economy by taming it.
The bears have been hoping that a combination of sell-the-news, negative seasonality, extended technical conditions, and worries about economic slowing would trigger a pullback, but the indexes have stayed stubbornly strong and have been fueled in part by FOMO and short squeezes.
While the action has been fairly narrow, with the Magnificent Seven names leading while the Russell 2000 IWM lags, the strength in the indexes is helping to keep sentiment very upbeat. The internal action may not be that bullish, but it is being overlooked due to the surprisingly consistent strength of the indexes.
We are now at the end of the third quarter, so there will likely be window-dressing action and positioning moves. The PCE news is likely to cause some movement, but unless it is significantly higher than anticipated, it won’t change the trajectory of the action.
It continues to be a tough market for stock pickers who are trying to put more cash to work, but the folks who focus on the indexes are loving it and remain extremely optimistic.
At the time of publication, Rev Shark had no positions in any securities mentioned.
