It all seems too easy – after months of sky-high inflation, prices are finally coming down after the Fed hiked interest rates eight times. Fed Chair Jay Powell’s comment that he is already seeing signs of pricing pressure cooling off emboldened investors into believing the worst is now finally over. Risky assets are rallying as FOMO (Fear Of Missing Out) returns.
In the meantime, the VVIX, a measure of the change of volatility in the VIX volatility index or the Fear Gauge, finished Friday’s session at its highest level to end a week since mid-October. If inflation as measured by the Fed’s preferred yardstick – the PCE index, ends up bouncing around the 4% level, then more action may need to be taken in his view to bring it closer to Powell’s 2% annual target.
Which begs the question – how will the market react over the coming months?
Future Wealth’s View
The fact is that the U.S. economy has surprised investors, market watchers and even the Federal Reserve over the last few months as inflation has decreased while the job market has remained strong after several interest rate increases. And while many are now openly hopeful that the economy can manage a soft landing, we are not so sure that we aren’t headed for a downturn. While last week’s events did not lead to an immediate reversal in this latest bear market rally, we also don’t think they offered any evidence to suggest a new bull market has begun.
Tuesday’s CPI number for January will be closely watched. If it drops materially from December’s reading of 6.5%, we could witness another leg up for the market. If it remains above 6%, the fact that inflation remains sticky will bring down the stock market in a hurry.
The Fed is not done tightening and investors would be wise not to celebrate yet. Be careful out there.