Mortgage rates one year ago were 2.75%, today they are some 6.5%, having more than doubled in 12 months. Incredible.
I was talking about it this morning briefly. In 2020 April, May, June, the FED and every other central bank was very dovish. Stimulus, loans, pay protection plans, etc were utilized to keep businesses afloat until the pandemic eased. It was terribly bullish for stocks as money supply grew to record highs.
On the flip side you look at the current environment an the FED is no longer the stock markets best friend. And yet with all the negative catalysts and excessive stock market bearishness, the $SPY is still some 55% above the Pandemic lows.
What does the market see going out into next year? Or is the market just digesting the recent action and setting up for another big move lower?
I wrote last week and the prior week about a retest of trendline support in the $SPY low $330s.
I think its coming in the short to medium term. But what happens after that?
I think the recent inflationary spike was more to do with the supply chain than anything else. The Pandemic fueled demand for housing that did not have ample supply to prevent prices from rising. Supply chain bottleneck were fans on a fire that was already starting to burn out of control.
And yet, I think I know how this ends. In a free market economy, supply inevitably catches up. And if that is indeed the case this time around, by the time supply catches up we will already be seeing a substantial price decline.
Deflation. I'll tell you what. The FED fears deflation far more than they fear inflation. We are already seeing it now. Rate hikes, aggressive ones, will stomp out the flames of inflation. And yet deflation. That is not as easily addressed.
As such, with the market open approaching, when the market sniffs a top for interest rate hikes, or even, perhaps the first cut. Stocks will have found a bottom. Not a minute sooner.
We will be watching rate hike expectations like a 'hawk'.
Trendline support like a 'dove'
Have a great Monday!