10 Observations on Big CPI Rally Day

Nov 10, 2022
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In no particular order, here's a quick list of 10 observations as markets soar on today's bullish CPI report:

1. It's probably because I'm old and increasingly grumpy, but wow does today ever bring back memories of 2008's "everyone back into the pool!" massive rally days when big news would hit markets. For those who weren't paying attention back then, those huge rally days were not reliable indicators that anything had actually changed.

2. Go back in time a year or two ago and imagine trying to convince yourself the market would be so positively excited about year-over-year inflation coming in at 7.7%. It's easy to lose sight of how much the entire investing landscape has shifted over the last 12-18 months. 7.7% inflation and Treasury bond yields of 4%+ are a completely different world than we were navigating just a year or two ago.

3. Two weeks ago today, we noted the likelihood of post-Fed/election market strength as the huge amount of hedging related to that event volatility unwound. Not saying that's all today's action is, but this market strength is right on schedule. Also worth pointing out that strength could last a while (I had written through year-end which seems a little long, but 2-4 weeks shouldn't surprise anyone).

4. That said, never lose sight of the market's primary trend when markets are moving sharply like this. That trend is definitively lower. Let the traders worry about short-term stuff (like the point above). Longer-term investors (i.e., SMI members) need to keep our focus right here on the primary trend. SMI's strategies are laser-focused on this, so just keep following those instructions.

5. While most retail investors will be focused on stocks today, the more important signal could be in bonds. As I've been discussing a lot recently (see here and here), once the market decides inflation is fading as the primary risk and shifts its attention to next year's likely recession risk, short-term bond yields are likely to peak and either flatten or roll over.

6. The 2-year Treasury Bond yield is already significantly higher than the Fed Funds rate. The Nov. 2 Federal Reserve meeting was largely about Powell telling markets the Fed was planning to slow the pace of future hikes. Today's softer-than-expected CPI report gives the Fed perfect cover to step down from hiking 75 to 50 basis points at the next meeting.

7. That said, there's also another CPI report coming in early December before we get to the next Fed meeting on Dec. 14. That December CPI report will ultimately matter a lot more than today's report.

8. Back to short-term bonds, today's gains in VTIP +0.38%, SHY +0.53%, BSV +0.83%, VCSH +1.10% explain why I've been inclined to stick with these vehicles rather than pivoting into the safety of MMFs or buying Treasuries. Again, one day doesn't make a trend-change. But when short-term rates eventually do flatten out (or even better, drop), these bond holdings should do well. I expect investors to do well in S-T Bonds in 2023 as the recession becomes the focus and inflation fears fade. That's welcome news for bond investors who haven't had much to cheer about in 2022.

9. Gold (+2.5% today, +7.0% month-to-date) is rallying along with lower yields. As previously noted, gold has a tendency to sniff out changes in Fed direction ahead of time and be one of the first horses out of the gate when they are shifting to an easier stance.

10. Go back and re-read point #4!

Written by

Mark Biller

Mark Biller

Mark Biller is Sound Mind Investing's Executive Editor. His writings on a broad range of financial topics have been featured in a variety of national print and electronic media, and he has appeared as a financial commentator for various national and local radio programs. Mark also serves as Senior Portfolio Manager to SMI Advisory Service’s Private Client managed-account program and the SMI Funds.

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