Tag: inflation

Worst First-Half Since 1970 - Time To Capitalize?

Posted on by Noah Kiedrowski

This has been the stock market’s worst first-half in over 50 years with inflation serving as the main culprit and a slew of ancillary pressures from China’s Covid lockdowns and the Ukraine/Russia conflict.

Through the first six months, no sector has been immune from the breath and reach of this bear market. The S&P 500, Nasdaq and Russell 2000 are well in bear market territory at June’s end.

Risk appetite across the spectrum has been eroded. The crypto market has collapsed, traditional IPOs and SPACs have dried up and several commodities have collapsed as of late.

Despite this massive wealth destruction, strategists from major Wall Street firms are forecasting that stocks will recapture most of their losses in the back half of the year.

The S&P 500 is expected to finish the year more than 20% higher from the end of June’s levels per the average year-end target derived from the top 15 Wall Street strategists. This forecast translates into the market recapturing most of the year’s losses, albeit finishing the year with a negative return of ~3%.

Deploying Capital

During bear markets or an extended period of a market-wide bear backdrop, investors have the unique opportunity to purchase heavily discounted stocks at a fraction of the price when compared to their peaks.

As history indicates, establishing long-term positions during corrections can lead to outsized gains over the intermediate and long term. As the selling pressure abates and the macroeconomic backdrop resolves, building equity stakes in high-quality companies bodes well for long term investors.

As the macro issues resolve over time, the markets will regain their footing and appreciate higher. The current market backdrop is the exact scenario where investors should be deploying cash on-hand to snap up heavily discounted merchandise in a diversified and dollar cost averaging manner.

Behind the Inflation Curve

The Federal Reserve has fallen far behind the inflation curve, putting through reactive interest rate hikes of 1.5 percentage points, with more to come throughout 2022.

Many politicians and executives have been sounding the inflation alarm since Q4 of 2021 to no avail while the Fed continued to buy bonds and pump liquidity into the system.

The latest inflation numbers by the Labor Department came in at 8.6%, the highest since December 1981. The reactionary Fed and runaway inflation have caused havoc on Wall Street while the Fed attempts to slam the breaks on the economy.

Second Half Bounce?

Although the first half of this year ranks among the worst in history, the selling may ease in the second half if history is any guide.

When the S&P 500 plunged 21% in the first half of 1970, it promptly reversed those losses to gain 26.5% in the second half and post a slight gain for the year. 1932, 1940, 1962 and 1970 saw first half decimation on par with 2022 however every one of those years saw a second half rebound.

Only one year saw the market recover the losses it incurred during the first half, in 1970 (Figure 1).

Figure 1

Figure 1 – Historical perspective of worst first half market performances and the respective full year outcomes when factoring in the second half of the year

Recession Possibility and Type

With the possibility of recession, there’s different underpinnings of a bear market that are broken out into cyclical-driven, structural-driven and “event-driven” stock declines of 20% or more.

Goldman Sachs (GS) holds the position that investors are experiencing a cyclical bear market which is marked by high inflation and rising interest rates. This combination results in price-to-earnings multiple contraction and thus a reduction in valuations.

The current climate is buffered against a structural bear market that is buoyed by strong corporate and household balance sheets. The positive side is that the average cyclical bear market lasts two years, far shorter than the average three in half years for a structural bear market. The average price decline during a cyclical bear market is only about 31% versus 57% during a structural one per Goldman.

Cash On-Hand

Deploying cash into an environment where the selling is relentless and indiscriminate can be a daunting task. However, for any portfolio structure, having cash on-hand is essential and in these environments is where this cash should be deployed in equities.

This cash position provides investors with flexibility and agility when faced with market corrections. Cash enables investors to be opportunistic and capitalize on stocks that have sold off and have become de-risked.

Initiating new positions and dollar cost averaging during these extended periods of weakness are great long-term drivers of portfolio appreciation. Absent of any systemic risk, there’s a lot of fantastic entry points for many high-quality large cap companies. Investors should not remiss and capitalize on this buying opportunity because it may not last too long.

Anchoring and Dollar Cost Averaging

Purchasing stocks at the exact bottom is nearly impossible however purchasing stocks at attractive valuations in a disciplined manner over time is possible.

Dollar cost averaging is a great strategy to use when anchoring down into a position with an initial sum of capital and following through with additional incremental purchases as the stock declines further. The net benefit is reducing the average purchase price per share in a sequential fashion (i.e., reducing cost basis). An example of building out a high-quality portfolio with subsequent dollar cost averaging throughput this market weakness can be seen in Figure 2.

Figure 2

Figure 2 – Initiating positions in high quality companies with subsequent dollar cost averaging to build out a well-diversified portfolio. These long equity trades along with options-based trades can be found via the Trade Notification service.

Conclusion

This has been the stock market’s worst first-half in over 50 years where no sector has been immune from the breath and reach of this bear market. The S&P 500, Nasdaq and Russell 2000 are well in bear market territory at June’s end.

Despite this massive wealth destruction, strategists from major Wall Street firms are forecasting that stocks will recapture most of their losses in the back half of the year. The S&P 500 is expected to finish the year more than 20% higher from the end of June’s levels per top Wall Street strategists.

Purchasing stocks at the exact bottom is nearly impossible however purchasing stocks at attractive valuations in a disciplined manner over time is possible. During bear markets, investors have the unique opportunity to purchase heavily discounted stocks at a fraction of the price when compared to their peaks.

As history indicates, establishing long-term positions during corrections can lead to outsized gains over the intermediate and long term. As the selling pressure abates and the macroeconomic backdrop resolves, building equity stakes in high-quality companies bodes well for investors. The current market backdrop is the exact scenario where investors should be deploying cash on-hand to snap up heavily discounted merchandise.

Noah Kiedrowski
INO.com Contributor

Disclosure: Stock Options Dad LLC is a Registered Investment Adviser (RIA) firm specializing in options-based services and education. There are no business relationships with any companies mentioned in this article. This article reflects the opinions of the RIA. Any recommendation contained in this article is subject to change at any time. No recommendation is intended to constitute an entire portfolio. The author encourages all investors to conduct their own research and due diligence prior to investing or taking any actions in options trading. Please feel free to comment and provide feedback; the author values all responses. The author is the founder and Managing Member of Stock Options Dad LLC – A Registered Investment Adviser (RIA) firm www.stockoptionsdad.com defining risk, leveraging a minimal amount of capital and maximizing return on investment. For more engaging, short-duration options-based content, visit Stock Options Dad LLC’s YouTube channel. Please direct all inquires to

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. The author holds shares of AAPL, ACN, ADBE, AMD, AMZN, ARKK, AXP, BA, BBY, C, CMG, COST, CRM, DIA, DIS, EW, FB, FDX, FXI, GOOGL, GS, HD, HON, IBB, INTC, IWM, JPM, LULU, MA, MS, MSFT, NKE, NVDA, PYPL, QCOM, QQQ, SBUX, SPY, SQ, TMO, UNH and V.

Stocks are NOT Out of the Woods

Posted on by Wayne Burritt

I get the distinct feeling that a lot of investors are feeling like the action last week in the equity markets may be a harbinger of good things to come. In other words, we might be out of the woods.

As much as I’d like to believe that I can’t jump on board. I still feel there’s more downside pain to come for stocks, tech, and other risky assets like Bitcoin (BTC) and crypto. But before I tell you why, let’s take a win, no matter how ugly it is.

Fact is, across the board last week equity markets were up. See for yourself…

Weekly Charts

Source

As you can see from this collection of multiple weekly charts, stocks booked a win last week. The Dow was up 5.4% and the S&P 500 - a good proxy for the broader stock market - was up 6.4%. Meanwhile, the Russell 2000 - a good gauge of all stocks - was up 6%. And probably most surprising of all, the tech-heavy Nasdaq was up 7.5%.

In addition, last week’s action in all four the indexes reversed multi-week slides. It was the first positive week in four weeks for the Dow, the S&P, and the Nasdaq. For the Russell 2000 it was the first up week in the last three weeks.

But as you can see from the above charts, last week’s action was an anomaly compared to the action we’ve been seeing over the recent past. In fact, if you take the above charts and drill out to what’s been happening over the past year, it’s clear the overall trend in all these markets is bearish. No ifs, ands, or buts.

As I warned about in my article at the beginning of June, the scant positive weekly action in these markets is now confirmed as little more than a series of “dead cat bounces.”

If you remember, a dead cat bounce can masquerade as a reversal to the upside. But it’s only a temporary reprieve and quickly resumes its prior downtrend. Unfortunately, that’s what we’ve been seeing in all these stocks markets. And while I’d love to be wrong on this point, the numbers don’t lie.

Stubborn Inflation Means More Downside

But it’s not just these technical patterns that tell me the markets have more downside pain to come. The other huge factor pressuring stock prices: Inflation and what it will take to bring it under control. Here’s what I mean.

In general inflation can drive investors to sell stocks. And that because inflation wears away at the value of invested dollars. If your money is worth 8.6% less this year that it was last year, nobody is happy.

But the biggest reason inflation drives investors to sell stocks is that that the “medicine” that’s needed to bring inflation down - higher interest rates - can have unpleasant side effects.

Fact is if higher rates do their jobs and bring prices down, companies have less money to do the things that investors want, like sell more goods, expand operations, and develop new products. And if companies aren’t doing what investors want, those investors sell their shares.

Result: A bear market like we’re seeing right now.

But as unpleasant as that is, not bringing inflation down is much, much worse. In fact, inflation can decimate entire economies. The last thing we want is to look in the rear-view mirror and see the current inflation rate of 8.6% as “the good old days.”

That’s why as unpleasant as the side effects of higher interest rates can be, the Fed must do everything in its power to get inflation under control. But don’t take my word for it: Here’s what Fed chairman Jerome Powell told Congress last week in his testimony and semiannual monetary policy report:

I will begin with one overarching message. At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all. Source

So far, so good. What exactly are they going to do about it?

Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy. We will make our decisions meeting by meeting, and we will continue to communicate our thinking as clearly as possible. Our overarching focus is using our tools to bring inflation back down to our 2 percent goal and to keep longer-term inflation expectations well anchored. Source

So, what does this tell me? With benchmark target fed funds rate now at a range of 1.5% to 1.75%, it’s clear that that’s just the beginning. More interest rate increases are coming. In fact, I think the Fed won’t slow down until it hits 3.5% and higher.

In addition, I now think the Fed is willing to take on a higher risk of recession in exchange for lower inflation. In fact, during his testimony Powell said that a recession could be in the cards: “It’s not our intended outcome at all, but it’s certainly a possibility … we are not trying to provoke and do not think we will need to provoke a recession, but we do think it’s absolutely essential” that prices come down. Source

Here's What to Do

There’s no doubt about it: Until inflation gets under control, rates will continue to go up. The Fed is making it clear that they’re going to do everything in their power to control rising prices.

And that means that there’s likely more downside to stocks as well as other risky assets like Bitcoin (BTC) and other cryptocurrencies. So, I wouldn’t be adding to any positions right now. And as always, don’t devote any more than 1% to 2% of your portfolio to crypto of any kind, including BTC.

Stay safe,
Wayne Burritt
INO.com Contributor

Disclosure: This contributor may own cryptocurrencies, stocks, or other assets mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

Consumers Are in a State of Shock

Posted on by Chris Vermeulen

As the Fed continues to posture future rate increases to battle inflation, recent economic data shows consumers are in a state of shock as price factors continue to skyrocket. Food, gas, materials, etc have shot up in price over the past 24 months – with no end in sight.

Consumers Are Recoiling Away From Traditional Spending Habits

The natural reactions of consumers fall into two categories: Grow or Survive. This is similar to how plants and trees operate. In healthy environments, plants and trees enter a growth phase – flowering and prospering. In an unhealthy environment, plants and trees enter a survival phase – directing resources toward anything essential for survival.

Global inflation is putting pressure on central banks to thwart excesses in the markets after 8+ years of easy money policies and nearly 2+ years of COVID stimulus. Consumers thus seemed to have switched into Survival mode very quickly over the last 6+ months. This reaction could have very telling outcomes for global GDP and regional economies over the next 24+ months.

In August 2021, we published an article highlighting the shift in consumer activity. It brings attention to how important Consumers are to the overall health of the global economy.

Consumer Confidence Dips Below 100

After the 2008-09 GFC, Consumer Confidence took more than 5 years to rally back above the 100 level (in 2015). The 2015-16 range was a US Presidential election year cycle – which usually disrupts US economic activities a bit.

In early 2017, Consumer Confidence started to rally higher – eventually reaching a peak in October 2018 near 137.90. Historically, the only other time Consumer Confidence reached higher levels was in 1998-99 (DOT COM Peak).

U.S. CB Consumer Confidence

Source

IYC May Start A Wave-5 Downtrend – Targeting $45-47 As A Base

Traders should consider the broader scope of the market trends while attempting to understand the opportunities that will come by waiting out the risks of trying to buy into a falling market. The Fed has clearly stated they intend to continue raising rates to break the inflationary cycle. Consumers will reflect these new risks by moving further away from traditional spending habits (Survival Mode) while attempting to wait out the risks to the environment.

It appears IYC has formed a moderate Wave-4 peak, which is below the Wave-1 bottom. From a technical perspective, it appears IYC will attempt to move below the $47 level over the next few weeks – attempting to establish a new base/bottom.

IYC Weekly Chart

US Real Estate Showing Signs Of A Top

No matter how you slice the data, more homes are flooding the US markets right now. Sellers are trying to “cash-out” at sky-high prices. Yet, buyers are staying very cautious because of rising interest rates and borrowing costs. Price Reductions on listed homes have risen to the highest levels over the past 8+ years. Sellers with homes on the market longer are aiming to tempt buyers with a discount. The race to the bottom has started. The Fed is going to add more fuel to the declines with another rate increase.

Recent Mortgage Refinance Index data shows the current 726.1 print is the lowest level since July 2000. This means the purchase and refinance are the most unfavorable for buyers over the past 22+ years (not since the peak of the DOT COM bubble).

Mortgage Refinance Index

Source

A reversion of home prices is almost a certainty at this point. I suspect a surge of new foreclosures and slowing sales will compound with layoffs and other economic contraction trends to present a “perfect storm” type of reversion event.

IYR Targeting $70 to $75 As Assets Unwind

IYR is likely to continue trending lower, targeting $70 to $75, before finding any real support. The reversion of asset valuation levels is still very early in the process of the Fed attempting to battle inflation. Depending on how the global markets react to the overall economic environmental change, we could see an extended contraction in assets lasting well into 2023 – possibly into 2024.

Traders should stay cautious of trying to chase the falling market trends. Real opportunity for profits exits when the reversion event is complete and when opportunities for less volatile extended trends resume.

IYR Weekly Chart

Protective Patience May Be The Best Trader/Investor Attitude Right Now

The US markets are already down by more than -25% overall. Any extended decline from current levels could push many traders/investors into a crisis. When the bottom sets up and is confirmed, we’ll begin to allocate capital back into sector trends. In the meantime, we avoid this massive drawdown event by waiting on the sidelines and being ready to deploy capital.

My strategies pulled capital out of the markets very early in 2022. Since then we have been sitting in CASH as a protective market stance while the global markets continued to decline. Protecting capital is the first rule for any trader/investor. Learning when to trade and when to be patient should be rule #2.

As Consumer Confidence continues to decline, Consumers have moved into a protective/patient (Survival) mode. Traders and Investors should consider the longer-term risks of not adopting a similar stance right now.

Learn more by visiting The Technical Traders!

Chris Vermeulen
Technical Traders Ltd.

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation for their opinion.

Here's What's Next for BTC and Stocks

Posted on by Wayne Burritt

There’s no doubt about it: Bitcoin (BTC) has broken down. In fact, it recently sliced through significant support at the $28K level like a hot knife through butter. Take a look...

BTC Daily Chart

Source

As you can see from this daily chart of BTC, the dominant crypto dropped below resistance that had been firmly established back in 2021. I recently wrote about this level being a crucial line in the sand for BTC. And unfortunately, it failed to hold up.

So, where do go from here? If you look at the left side of the above chart, it’s clear that the best case for BTC support now sits somewhere in the range of $6K to $12K. And from its current level, it’s pretty much a straight shot to that range.

In addition, BTC spent quite a bit of time meandering in that range during 2020. I wouldn’t be surprised that, if we get that low, you’ll see similar sideways action.

And it’s not just BTC that’s gotten hammered. In fact, the entire cryptocurrency space now stands at somewhere around $1 trillion in market cap. That’s a far cry from the $3 trillion it enjoyed late last year.

Ouch.

But before you sound the death knell of crypto, remember that it’s not the only asset that’s been taken out back recently. In fact, I could just as easily put a chart up there of the Dow, the S&P, the Nasdaq, and the Russel 2000 and you would be reading much the same story, albeit not as dramatically.

Fear is Driving Selling

As I’ve been saying for months, investors are looking at crypto just like they do every other risky asset... they are selling. And they’re selling pretty much regardless of what’s happening to the asset’s underlying fundamentals.

Why all the selling? Pretty simple: The markets are oozing with fear right now. And when fear takes over, lots of assets get thrown out, no matter how good their underlying fundamentals may actually be.

That’s sad, but it’s true.

So, what’s driving all the fear? Take your pick. Inflation, global supply chain issues, the war in Ukraine, geopolitical uncertainty, higher interest rates.

And the rub of it is that all of these are playing a significant role in amping up the fear in the marketplace. If it was just one, it wouldn’t be so bad. But it’s not - it’s all of them.

The war in Ukraine is contributing to inflation of energy and food prices. Supply chain issues are contributing to higher prices and operational uncertainty. Meanwhile, inflation is making everything more expensive.

But it’s the last fear driver that I mentioned - higher interest rates - that really has everyone on edge. And while we all agree that those higher interest rates are the medicine to fight inflation, no one knows for sure how high they must go to get results. So far, inflation continues to roar higher despite higher interest rates.

Maybe we can take some solace in the fact that the Fed will likely continue to raise rates until the inflation numbers are headed in the right direction. Chairman Powell’s said as much to Congress just last week. And I don’t have much doubt about his - or the Fed’s - resolve to bring inflation down.

But until we begin to see inflation numbers drop, it’s a done deal that you’ll see more of the fear-based volatility and chop that you’ve seen for stock, tech, and crypto since the beginning of the year.

Sure, you’ll likely see some up weeks in the meantime. And there’s little doubt that an outlier or two in these asset classes are likely to thrive. But overall, until inflation gets under control, the outlook for crypto, stocks, and tech is lousy.

We Shouldn’t Be Surprised

The fact is we shouldn’t be surprised by what’s happening in all these risky asset classes. There’s had been gobs of money sloshing around the economy for years. And that low-priced capital has made just about everyone go out and buy a ton of stuff.

In my book, that’s been a good thing. It’s helped people and business weather a massive pandemic, driven innovation, and provided much-needed jobs for millions.

But one of the side effects of that cheap money has been inflation levels, unlike anything we’ve seen in decades. Certainly, because of all that cheap money, I figured we might see an uptick in inflation. But I had no idea it would come at us in such magnitude. Nobody did.

And when it comes to crypto, we shouldn’t be surprised that it’s been beaten up even more than its peers. While risk has had a hand in that, the fact that crypto is still a nascent and largely unproved asset class and marketplace make it worse. It’s simply going to get beat up worse when investors lose their appetite for risk.

So, what to do? As I mentioned, I think we’re going to see a moderation in inflation down the road. And when that happens the markets - including crypto - will start to recover. When that happens - and let’s say we get a handful of decent inflation reports - I would begin heeding my golden rule: Buy companies that know what they’re doing in markets with strong upside. And don’t sweat the small stuff. Take a long-term view. And don’t devote any more than 1% to 2% of your portfolio to all your crypto holdings, including BTC.

Stay safe,
Wayne Burritt
INO.com Contributor

Disclosure: This contributor may own cryptocurrencies, stocks, or other assets mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

Taming Inflation - Tough Action Needed

Posted on by Noah Kiedrowski

Curbing Inflation - The Priority

Rolling back inflation is an absolute necessity before these markets can start to turn back this tide of relentless selling. The process of curbing inflation will not be quick, nor will it be an easy feat. A delicate balance must be exercised to curb inflation via rising rates while not destroying the economy.

To curtail these 40-year highs in inflation, the economy will need to slow, demand will need to cool and the supply chain will need time to catch up to come back into balance.

The Federal Reserve will raise short-term interest rates from historic lows near zero as the economy recovered from the pandemic. The Federal Reserve will be looking for lower CPI numbers, softer labor market conditions and resolution of supply chain constraints prior to taking a dovish stance on future rate hikes. The latter will be the confluence of catalysts the market needs to propel higher.

Overall Markets

The overall markets have been under heavy and relentless selling. The average Nasdaq stock has undergone a 50% drop from its high.

The S&P 500 now trades at a level first reached more than 16 months ago in early February 2021. This move negates the post-Covid advance in equities.

The multi-wave corrections that culminated in February 2016 and December 2018 both bottomed at levels first reached nearly two years prior. Thus, these markets are reaching the point where the past two years of appreciation has been erased.

Bank of America’s Bull & Bear Indicator, which captures fund flows and other market-based risk-appetite measures, is well in the fearful depths that typically imply a buying opportunity. During prolonged stressed periods (i.e., 2000-’02 and 2008-’09) bear markets had this gauge persistently stuck at these low levels while prices continued to trend lower.

University of Michigan consumer sentiment poll came in at a level lower than during the global financial crisis and if not revised higher will rank as the bleakest monthly reading since 1978. Extreme negative readings in the University of Michigan poll have served as great inflection points for how stocks perform over the subsequent 12-month period.

Per JPMorgan the S&P 500 has averaged a 25% gain in the year following the eight Michigan sentiment troughs going back 50 years, with the worst return at 14%.

It’s noteworthy to point out that hindsight is 20/20 thus troughs are only known in a look-back analysis after sentiment starts to recover from a low. The markets may be close but may not be at this point yet.

Key Macroeconomic Factors

The Consumer Price Index (CPI) has become the most influential and critical variable in today’s market. The CPI readings directly impact monetary policy put forth by Federal Reserve via interest rate hikes, bond buying and liquidity measures.

Inflation continues to be persistent throughout the economy and the Federal Reserve must balance curtailing inflation without destroying the economy. The impact of inflation is now flowing through to companies and consumers alike. Inflation has reared its ugly head and is now negatively impacting companies’ gross margins and dampening consumer demand due to soaring prices, specifically gasoline.

The confluence of rising interest rates, inflation, China Covid lockdowns and the war in Ukraine has resulted in first half of 2022 overwhelmingly negative. As such, the market appears to be factoring in a worst-case scenario that may result in a Federal Reserve induced recession as a function of over-tightening on monetary policy and/or its inability to combat inflation responsibly to engineer an economic “soft landing”.

However, if any of these macroeconomic factors abate (i.e., CPI, China re-opening, Russian/Ukraine conflict and interest rate hikes) this could serve as a launching pad for the markets to stabilize and appreciate higher.

Inflation - 40 Year Highs

Inflation pushed higher in May as prices rose 8.6% from a year ago for the fastest increase in nearly 40 years. Excluding volatile food and energy prices, core CPI was up 6%. Both CPI and core CPI exceeded estimates and came in hotter than expected. Surging costs for shelter, gasoline and food prices all contributed to the increase.

The latest CPI numbers casted doubt that inflation may have peaked and adds to fears that the U.S. economy is nearing a recession.

The CPI report comes at a time when the Federal Reserve is in the early stages of a rate-hiking campaign to slow growth and bring down prices. May’s report likely locks-in multiple 50 basis point interest rate increases ahead. With 75 basis points of rate rises already put in place, markets widely expect the Fed to continue tightening through 2022 and likely into 2023.

Conclusion

Curbing inflation is an absolute necessity for the markets to stabilize and start to reverse the tide of relentless selling. A delicate balance must be exercised to curtail these 40-year highs in inflation.

As a consequence, the economy will need to slow, demand will need to cool and the supply chain will need time to catch up to come back into balance.

The Federal Reserve will be looking for lower CPI numbers, softer labor market conditions and resolution of supply chain constraints prior to taking a dovish stance on future rate hikes. The latter will be the confluence of catalysts the market needs to propel higher.

The Consumer Price Index (CPI) has become the most influential and critical variable in today’s market. The impact of inflation is now flowing through to companies and consumers alike with Target and Walmart issuing profit warnings.

The market appears to be factoring in a worst-case scenario that may result in a Federal Reserve induced recession as a function of over-tightening on monetary policy and/or its inability to combat inflation responsibly to engineer an economic “soft landing”. It will likely take successive downward CPI readings before rates will stabilize and the markets can appreciate higher.

However, if any of the other macroeconomic factors abate (i.e., China re-opening and Russian/Ukraine conflict) this could serve to accelerate the stabilization of the markets and remove the functional constraints for the markets to appreciate higher.

Noah Kiedrowski
INO.com Contributor

Disclosure: Stock Options Dad LLC is a Registered Investment Adviser (RIA) firm specializing in options-based services and education. There are no business relationships with any companies mentioned in this article. This article reflects the opinions of the RIA. Any recommendation contained in this article is subject to change at any time. No recommendation is intended to constitute an entire portfolio. The author encourages all investors to conduct their own research and due diligence prior to investing or taking any actions in options trading. Please feel free to comment and provide feedback; the author values all responses. The author is the founder and Managing Member of Stock Options Dad LLC – A Registered Investment Adviser (RIA) firm www.stockoptionsdad.com defining risk, leveraging a minimal amount of capital and maximizing return on investment. For more engaging, short-duration options-based content, visit Stock Options Dad LLC’s YouTube channel. Please direct all inquires to

in**@st*************.com











. The author holds shares of AAPL, ACN, ADBE, AMD, AMZN, ARKK, AXP, BA, BBY, C, CMG, CRM, DIA, DIS, FB, FDX, FXI, GOOGL, GS, HD, HON, IBB, INTC, IWM, JPM, MA, MS, MSFT, NKE, NVDA, PYPL, QCOM, QQQ, SBUX, SPY, SQ, TMO, and V.