How To Make Sense Of Today’s Confusing Stock Markets

Over the last week, the S&P 500 (SPY) is up by just under 1%. This kind of undersells the market’s recent volatility (or choppiness). In fact, we briefly broke below the 3,900 level early this week, before…

the recovery to 4,000 at the end of this week.

Today’s session encapsulated this choppy environment. After a strong session yesterday, the market gapped down. Then, recovered these losses before tumbling lower due to a hawkish ECB meeting.

However, these losses were recovered by the close as the market looks ahead to the CPI report and the upcoming FOMC meeting.

It should be noted that the market has done an admirable job of absorbing bad news without falling apart.

This includes a steady stream of hawkish FOMC speakers, a hawkish ECB meeting, a strong US dollar, and more signs of weakness in the housing market. Yet, the S&P 500 (SPY) has stayed above the June lows.

Another interesting thing is to compare the current moment to the June lows of around 3,600. Sentiment is back to the June levels, yet stocks are 10% higher.

More importantly, the fundamentals are much better with inflation in a much better place. And, the market and economy have absorbed 3 more months of tighter monetary policy but continue to show minimal damage in terms of consumer spending and employment.

Like I said in today’s trade alert, the much-ballyhooed soft landing scenario that seemed implausible when the Fed started its rate hikes is now quite plausible.

Fed vs Fundamentals

The major sticking point in the bullish case is not the economy or inflation or earnings. It’s the Fed.

They seem oblivious to evidence that inflation has peaked or the damage that a strong dollar is doing to the rest of the world (ROW) or the possibility that too tight monetary policy could create a bigger problem down the road.

In fact, they continue to focus on the need to bring down inflation as their primary focus. It’s fair to say that this market rally ended during FOMC Chair Powell’s Jackson Hole speech, where he continued to pound the table on the importance of fighting inflation.

And, the selling picked up steam as more FOMC members continued to send the same message.

That’s why I picked the above title. The fundamentals are trending in the right direction, but it doesn’t mean much if the Fed continues to aggressively raise rates.

According to a recent report from the WSJ…

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