Coping With Data Lag
That’s the challenge for investors as the Fed Board has been on what seems to be a public speaking tour these past couple of weeks. To a person, they have all trumpeted their commitment to beating inflation, regardless of the consequences for the economy. Predictably, traders and investors were not enthused going into the October 13 release of inflation data (“CPI”). The headline number was announced, falling 10bp from 8.3% to 8.2%. We thought that was good news, but good news doesn’t sell advertising so it was characterized as “hot” inflation by TV journalists and some analysts, driving the market down to a new bear market low that morning…for about an hour. The rally that followed was dismissed as the 8th bear market bounce in the past month and would soon fade. How many bear-market bounces does it take to put in a bottom? Apparently some investors thought more than eight was enough since that rally continues today, with the S&P 500 more than 11% above that low. What happened?
First and foremost, investors know bargains when they see them. Secondly, there has been a shift in the narrative by many respected analysts, not on TV, who say the Fed has done enough and should tread lightly as it allows the inflation data to catch up to what is actually occurring on the ground in the real economy. History has proven that it can take 9-12 months for the Fed’s tools to have an impact on inflationary pressures. We know the tools are working, but the results are slow to show in the data. It’s barely 8 months since the Fed’s unprecedented policy measures took effect. They’re designed to diminish demand, shrink the money supply, and move the economy to below-trend growth. That’s happening, but it’s not yet fully reflected in the data. We’re among those who believe the Board of Governors should have begun to taper rate increases in September. The number now clamoring for that to happen next week has surged. We hope they’re listening.
Was the October 13 low the bottom of this cycle? Could be, but there’s more data lag ahead. Aside from inflation pressures, the Fed’s actions will negatively impact earnings and P/E multiples. Many thought we’d see those effects in July’s earnings season but that was too soon. We’re now seeing some dramatically mixed results in the current earnings season with Meta, Amazon, Alphabet, and a select few others falling short and being punished while Apple and other Techs, along with the Financials and Energy sectors pivoted to the upside on their results. Investors are enjoying the overall results for now but should remain cautious about committing new capital prior to the November and December Fed meetings and January’s earnings season. Data lag will eventually catch up to most earnings if the Fed remains on its current path.
Is that likely? We’re expecting something less than a 75bp rate hike next week. If we’re wrong, this rally we’re enjoying could be reeled back in to near the October 13 low. That’s likely to extend the bottoming process well into next year as we endure more Data Lag. If the Fed announces a tapering of its interest rate hikes or hints of an impending pause down the road in its public statement, we stand a good chance of retaining much of what we’ve gained these past two weeks. Stay tuned.
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