Good morning. The S&P500 continues to reclaim its losses from the prior two weeks. The market was on its back last week. The bears looked ready to pounce on even more downside, and then on Friday a massive price recovery ensued.
$SPY is up over $20 from the lows of a week ago. It is a stunning reversal. And yet despite the gains, the intra-day action wasn't always giving the bulls the green light.
The nasty pre-market reaction after the much anticipated CPI report gave participants another dose of instantaneous downside. Yet less than two hours later those losses turned into gains, and the massive dip was bought and then some.
Yesterday another morning dip had the market on edge.
but that morning weakness has been a tremendous buying opportunity the last 8+ years.
Wednesday and Thursdays action continued to show that the dip buyers are still out there, and the morning weakness is just another chance to shake out the weak hands. Until that theme changes for good, it remains tough betting against this market for very long.
While the market is busy recovering losses, my concern turns to the longer term outlook for the market. With concerns over inflation slowly creeping in... inflation.... yeah, I guess we'll believe it when we see it, but clearly its more of a concern now than at any time during this bull market.
It has been a veritable utopia for Central Banks. Low inflation has meant they can keep their foot on the easy money gas peddle.
With inflation possibly on the rise, we could see borrowing costs rise as well. This is not a positive for those relying on cheap debt to continue to fund their shareholder reimbursement schemes. We could see the corporate share buyback binge come to an end. We could see the debt for dividend program end for the heavily indebted corporations. Low interest rates have taken years of futures gains and brought them to today. Higher interest rates will inevitable slow growth and willl end the sharebuyback frenzy. And will see corporations EPS growth slow significantly as earnings will start being compared against a similar share count each quarter instead of a share count in decline.
Obviously I am looking far ahead. Inflation and rising interest rates are not going to change the current dynamic overnight. But the market also doesn't price stocks based on what is happening now. The market is forward looking.
The veritable nirvanna corporations have been operating in over the last 8 years... it wasn't going to last forever. And perhaps the Central Banks will be able to juggle policy enough to deal with the possibility of higher inflation. Which means this bull market is still in the middle innings.
The concern is the concern many have had since the FED embarked on the greatest financial experiment in the history of the world. What happens when inflation comes back with a vengeance. Will the FED be able to combat it without crushing asset prices?
While you hear many say the FED fears deflation far more than they fear inflation, I think in the years ahead we are going to learn which is true. And the recent market action could be signalling just how troubling a spike in inflation will be for the financial markets.
For now it is a noteworthy development. Like slow, measured, telegraphed Central Bank rate hikes... a little inflation isn't so bad. However an abrupt and sustained spike in inflation?? It's still a little early to say it is on the horizon, but clearly it is a noteworthy development.