Good Information is Good Information

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When there’s a massive information launch, I like to take a look at the market’s response earlier than seeing the numbers. I’m extra within the response to the information than the information itself.*

One month in the past I used to be driving into the town with Josh, ready on the CPI report with my face glued to my cellphone. Futures tanked at 8:30, and I knew inflation got here in hotter than anticipated.  Positive sufficient, the market was none to happy that core CPI elevated on the quickest tempo since 1982.

The fed had finished 5 fee hikes to that time, which didn’t do something to decelerate the speed of worth will increase.

The fed can’t repair provide chains. They’ll’t pump oil. They’ll’t manufacture semiconductors. They’ve one software to decelerate the financial system, which didn’t appear to be working.

Throughout that automotive trip in, I might solely suppose, how excessive will they should take charges to decelerate demand, and what kind of injury will that inflict on the inventory market, and extra importantly, the actual financial system?

Nicely wouldn’t you understand it, on the day once we bought the worst inflation print in 40 years, the S&P 500 gained 2.6%. However after all, that’s solely half the story.

In September, headline inflation rose greater than 8% for the seventh consecutive month. And as I already talked about, the market’s instant response was not fairly. The S&P 500 gapped down 1.6% on the open and proceeded to careen decrease, at one level falling as a lot as 2.4% on the day, which was 27% decrease than the excessive print from earlier within the yr. After which, for causes that no person can probably know, shares went vertical. They gained 5% from the morning’s low, closing 2.6% greater on the day.

On The Compound and Friends that afternoon, we spoke about how humorous it will be if the market bottomed on the day once we get the worst inflation information. We referred to as that episode Good Information is Unhealthy Information, as a result of typically markets are bizarre like that. The pondering was, possibly issues are so dangerous that the fed would decelerate the tempo of fee hikes. Now that didn’t occur, and it’s too quickly to declare that day the backside, however the risk is in play.

Yesterday inflation got here in at 7.7%, which in a vacuum will not be good. However markets don’t work in a vacuum. They transfer on expectations. Yesterday’s traditionally excessive print was not as dangerous as we feared, and the group went wild. The S&P 500 gained greater than 5% for simply the twenty third time going again to 1950. I repeat, inflation was 7.7%, and the inventory market cheered like we had simply solved world starvation and world peace.

As you very nicely know, gigantic day by day positive aspects can solely occur in dangerous markets when absolutely the worse doesn’t come to go. The desk beneath reveals whenever you had these kinds of positive aspects. You’ll see 1987, 2002, and numerous 2008. When shares gained 5%, on common they had been in a 36% drawdown.

Shares don’t transfer on good or dangerous, they transfer on higher or worse than anticipated. And when expectations get too excessive or too low, it’s regular to see a violent response like we did yesterday. It’s nice to see shares transferring greater not on hope that the fed will pivot as a result of issues are getting so dangerous, however as a result of the information that was inflicting them to maneuver so aggressively is definitely displaying indicators of enchancment. Excellent news is sweet information.

We’re not out of the woods but by way of inflation. It’s good to see, but it surely’s just one month. And the reality is, we’re by no means out of the woods. We’ll transfer previous obsessing over inflation to worrying about why inflation goes decrease within the first place. Softer demand will result in decrease spending which is able to result in decrease earnings which ought to theoretically result in decrease inventory costs. Except! Except the market has already discounted that. After which it will likely be time to fret about one thing else.

*First transfer is at all times the mistaken transfer. Besides when it’s not

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