Bullish Price Action is a Fresh Change of Pace

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Last week’s price action for the U.S. stock market was nothing short of impressive when considering the headwinds of commodity inflation, services inflation, rising bond yields, the war in Ukraine, a resurgence in food prices, stubbornly high rental costs and a Federal Reserve that has broadly stayed the course on hawkish monetary policy.

Prior to Friday’s strong finish to a healthy set of weekly gains for stocks, investors had to parse a major shakeup in the British Parliament, a jump in energy prices in light of the Biden administration releasing another 50 million barrels of oil from the Strategic Petroleum Reserve, a two-hour hardline speech from China President Xi Jinping and some stark inflation data from outside the United States that is now sparking protests.

Japan is now seeing inflation accelerate, fueled by a crumbling yen that is inflating import costs, with food and energy being the biggest culprits. For the month of September, Japan’s annual inflation rate rose to 3%, the biggest increase in more than three decades. “Price hikes are broadening and the weak yen effect is seen in a wider range of items such as durable goods,” said Toru Suehiro, chief economist at Daiwa Securities Co.

Across the pond, inflation in the U.K. is now running hot. Its inflation gauge, the Consumers Prices Index Including Housing (CPIH) rose by 8.8% in the 12 months to September 2022, up from 8.6% in August. Strip-out housing and the Consumer Prices Index (CPI) rose by 10.1% in the 12 months to September 2022, up from 9.9% in August. The CPI monthly rate was 0.5% in September 2022, compared with 0.3% in September 2021. In September 2022, the CPI annual inflation rate returned to the July level, which was the highest annual CPI inflation rate in the National Statistic series, which began in January 1997.

On any given week during 2022, these kinds of headlines would have evoked a wave of revulsion to equities, especially growth stocks. But instead, market participants opted to focus on what has generally been a good front end to third-quarter earnings season.

A ‘Blue Horseshoe loves a less-hawkish Fed policy by Christmas’ statement triggered a rally that included all 11 sectors, provoked a 1% slide in the dollar and steadied the weekly selling pressure in the Treasury market. It was quite a reversal and shored up sentiment that needed a booster shot to bolster the mojo of some better-than-forecast earnings.

The current losses for the major indices are as follows:

Dow Jones Industrial Average: -14.5% Year to Date (YTD)
S&P Midcap 400: -18.6% YTD
S&P 500: -21.3% YTD
Russell 2000: -22.4% YTD
Nasdaq Composite: -30.6% YTD

So, for all intents and purposes, the bulls are trying to muster a case for turning the outgoing tide against the broad agreement by smart money that some degree of a recession is all but a foregone conclusion. Investors will have much more to chew on following this week’s earnings parade, where most of the market’s headline names in big-cap tech stocks will post their results. Plus, the Fed’s favorite inflation indicator, the Personal Consumption Expenditures Price Index (PCE), will cross the tape Thursday morning, with economists forecasting a 0.3% increase in the headline number and the core inflation rate to increase by 0.5%.

The market is sensing peak inflation conditions, and just maybe some evidence will be forthcoming with the next set of economic data points amid the price action of stocks last week. After all, last week showed a market that was very eager to catch this pivot in the degree of the inflationary uptrend. What seems to be ever clearer is that despite all the woes of the world outside the United States, the things that still matter the most are well entrenched — Federal Reserve policy and earnings.

Save the Date: I will be hosting a subscribers-only webinar entitled “The Sudden End to the Bear Market: 5 Reasons the Bear Market is About to End” on Oct. 26 at 1 p.m. EDT. The event is free to attend, but you must click here to register.

P.S. Orlando MoneyShow, Oct. 30-Nov. 1, Omni Hotel Champions Gate, Florida: Join Steve Forbes, Ed Yardeni, Mark Skousen, Bob Carlson, Bruce Johnstone, Terry Savage, Keith Fitz-Gerald and me. For more information, go to: Perry.MoneyShow.com. Use code 05775.