Wednesday's Market Minute: What Did You Expect?

Tuesday’s sell-off should be a pretty obvious warning that investors in the U.S. stock market remain inappropriately optimistic on the current economic situation. What exactly did bulls have in mind the past week as they stormed back into the market for a powerful four-day rally? It was no mystery what was on the calendar, and even if there was no surprise, would a month-over-month decline of one-tenth of a percent in inflation warrant a change in the regime of the past nine months?

Consumer prices crept higher by 0.1% last month, and the stock market had the worst day since June 2020. It looks extreme, but it makes sense. COVID was a net positive for the stock market, mostly because of all the stimulus. Today, we have the opposite. It shouldn’t be rocket science, but it seems a lot of people are unwilling to accept this inconvenient truth.

The two most comparable historic periods to today are the inflation era of the 70s and the dot-com bust. That is bad company to be in. Given those two options, I think most Americans would choose the dot-com bust over the crippling inflation of the 70s. That implies that the best-case scenario is a dot-com repeat: a severe and protracted decline in asset prices, with a softish recession in tech companies to go along with it. What joy!

The only solace the market has to offer right now is the reliability of its relationships and tradeable exploitation of trends. The dollar made a new high last week, so like clockwork, the 10-year yield is following. As those two continue their trend higher, stocks should continue their trend lower. Don't bang your head against a wall expecting something to change until the evidence suggests it.

What else should we expect? If everything went according to expectations Tuesday and CPI came in at 8.1%, would it have been something to celebrate? It’s been six months since the high in crude oil, and median consumer prices are still rising. "Peak inflation" was always a straw-man argument. The elevation of prices is what matters. Good luck.

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