Fake Rally Verified But...

Wait for it………..

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Ian Shepherdson, chief economist, Pantheon Macroeconomics: “Chair Powell’s speech forcefully reiterated the Fed’s intention to tighten policy enough to bring inflation down to target and then keep it here, acknowledging that this likely means '…some pain to households and businesses.’ The Fed appears frustrated by market expectations -- which we have never shared -- of easing next year.

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Fall likely short lived. Buying opportunity!!

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Not for me, I see this as still a false bottom.

The Fed's goal for 2022 is to get their rate to ~3.4, it's currently 2.25-2.5. This means at least another full point in hikes before the year is out. For 2023 they've said their goal is 3.8, which means going up at least another .5 over the course of 2023. The Dow is down over 11% for 2022 thus far with nothing but continued high inflation, continued high (and rising) energy costs, Quantitative Tightening from the Fed and rising rates to look forward to.

Getting into the numbers a little, we see personal savings have been dropping almost steadily for over a year now. Combine that with the news that credit card debt has been climbing sharply since 2021 and we can safely guess people have been busy trying to continue to fund their ever-more-costly lifestyles by burning through savings and creating debt instead of changing their habits. Add to this that home foreclosures and car repos are well above what they were a year ago and there's not really anything on which to base the belief that we've hit bottom yet.

I believe we're somewhere at the end of the beginning of our economic troubles. This Fall is going to be rough so either sell now or hold through the pain.

So is it a fake rally or a short fall?

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The chart you linked shows the savings rate is a little lower than the historical average, but that’s coming off some of the highest saving rates in history, releasing pent up demand from covid, and having gone through the highest inflation in decades. Honestly, the savings rate looks pretty good all things considered.

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Normally I would agree, but I'm looking at that within an economic environment of long-term high inflation (which has been staying well ahead of wage growth), high and continuing to rise energy prices, continued high fuel prices, continued high (and increasing, in some cases) food prices, increasing consumer debt, increasing foreclosures and increasing vehicle repos.

Were this in the economic environment of 2015-2018 (for example), people eating into their savings after such highs would actually be considered a good thing as it would mean economic activity was picking up. This isn't that, unfortunately.

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This is priced in.

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I don't think it is, at least not nearly to the extent it should be. The market's reaction to Powell's comments yesterday seems to indicate much of the market has been trying to wishcast the Fed into pausing, or even pivoting, on their current contractionary policy. In an environment where this is truly priced in, Powell's comments shouldn't have elicited a 3%-4% drop over the rest of the trading day after he made them.