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| September 12, 2022

Last Week On Wall Street

In a holiday-shortened week of trading, stocks posted healthy gains despite more tough talk

on monetary policy from Fed officials. The Dow Jones Industrial Average rose 2.66%, while

the Standard & Poor’s 500 gained 3.65%. The Nasdaq Composite index picked up 4.14% for

the week. The MSCI EAFE index, which tracks developed overseas stock markets, lost 1.26%.

Stocks Rise

Stocks fell coming off the Labor Day weekend, dragged down by news that Russia was cutting

off natural gas supplies to its European customers. Stocks also were under pressure due to a

surprisingly strong report on business conditions, which heightened fears of continued Fed

hawkishness.  Sentiment quickly improved as bond yields turned lower and oil prices fell.

Investors reacted positively to comments by Fed Vice Chair Lael Brainard, who reiterated the

Fed’s commitment to quashing inflation while acknowledging the risks of going too far. Stocks

added to their gains on Thursday as the market digested another speech from Fed Chair Powell

and a 0.75% hike by the European Central Bank. The markets surged on Friday amid little news,

ending a positive week on an upbeat note.

No Inflation Walk Back

In his first public comments since his speech at Jackson Hole that sent markets into a tailspin, Fed

Chair Powell did not seek to soften the edges of the Fed’s commitment to fighting inflation. In an

interview on Thursday, Powell reaffirmed the need for sustained and robust actions to bring down

inflation. He emphasized that it was critical that “the longer inflation remains well above target, the

greater the risk the public does begin to see higher inflation as the norm, and that has the capacity

to really raise the costs of getting inflation down.” With the Federal Open Market Committee (FOMC)

set to meet on September 20-21, these comments may indicate that market expectations of a rate hike

of 0.75% this month align with the Fed’s plans.

This Week: Key Economic Data

Tuesday: Consumer Price Index (CPI). 

Wednesday: Producer Price Index (PPI).

Thursday: Retail Sales. Industrial Production. Jobless Claims. Powell speaks.

Friday: Consumer Sentiment.

This Week: Notable Companies Reporting Earnings

Monday: Oracle Corporation (ORCL).

Final Thoughts

Stocks bounced from oversold levels last week.  Sentiment is still extremely negative and bearish.

For what it's worth consensus is usually wrong. Peter Atwater has a word for this: it’s called “mood

mirror.” In this situation, those pundits with negative sentiment act as a mood mirror. Everyone is

bearish, so they reflect people’s bearish sentiment back at them. In the process, they seem smart,

because they are reinforcing people’s views. People don’t like cognitive dissonance. People don’t

like their views challenged. They like them reinforced. It feels good.  One of the challenges of

investing  is that you should listen to all viewpoints and evaluate them with equanimity.  Easier said

than done.

The first thing you have to do is to separate the source from the message. Maybe the source is someone

you typically wouldn't agree with, so you think the message is wrong. Everyone sometimes says smart

things. Nobody is 100% wrong all the time. Even the biggest dullard has insight from time to time.

And even the smartest people are wrong not infrequently. Someone might call this critical thinking.

Seems to be in short supply these days. It is all about tribes and tribalism. Team red and team blue.

Oh and don't look now, but a budget bill must be in place in Congress by October 1st in order to avoid

a government shutdown.  It is election year, so maybe they will play nice.  However, there's nothing like

a manufactured crisis at election time to try and make the other side look bad.

It appears we are in a trading range for the time being, from around 3600-4300 in the S&P 500. I think

we will creep up towards the higher end of the range, but that’s about it as it is all contingent on the Fed.

Stocks can’t meaningfully rally until we get some kind of pause signal out of the Fed, or we get some

visibility as to the end of rate hikes. Of course, the market will rally before we get that visibility.  That's

just typically the way it works.  Make no mistake, the market is currently hinged on inflation and interest

rates. The CPI data tomorrow is likely to move markets one way or the other.  The soft data shows CPI

should be declining, but there could be something unaccounted for.  Then Fed Chair Powell speaks on

Thursday.  He will continue to talk tough on rates, so don't be surprised if we get a pullback around his

comments.  Next week the Fed is likely to announce a 75 basis point rate increase and Powell will speak

yet again on Wednesday.

Stay tuned.