Stocks Rally As Inflation Falls In The US

We have been looking for the recent equity market strength into and beyond the US inflation data of last week. Still, to be followed by a Stock drop?

The decline in inflation from 7.1% to 6.5% was quite possibly as good as it gets. Inflation has the clear potential to stabilise in the mid-6s as global Oil prices continue to trend back up again. Then, there are the services and shelter costs with plenty of price increases already in the pipeline.

What was most interesting about the rally on Wall Street on Friday, was not that there was still some next-day follow-through on the back of that inflation number, but that the rally barely managed to make a new high. 

As is the norm of late, Asia futures trading is likely to again try to make ground to the upside. Europe could be a little choppy. Then, we will get a morning buying frenzy on Wall Street. It will be telling if such a rally, should it occur, will be able to hold up during the afternoon session and into the close. Should the market begin to break down at any point over the next 24-48 hours, I would be very cautious that something big was developing.

The reason for being so on the day specific is precisely because we could be nearing the top of the US equity market for all of 2023? 

If we do see a top, it could easily be the start of a massive stock market decline. Given the continuing deterioration of the fundamental economic backdrop. 

Last year when forecasting the highs for the year in the first week, and a 20% decline, that was in a climate of all the big banks being excitedly positive about the year ahead? 

The most rewarding opportunities in markets occur when the prevailing sentiment is wrong. I think we could still be in that kind of position, as despite the economists of the big banks warning of recession, I doubt their funds and portfolio and proprietary traders are all so committed to such a bearish outlook. 

People often make the mistake of thinking the economists and strategists of big institutions have sway over the positioning of that organisation in the markets. That simply is not the case. Traders act independently, and often in direct opposition competition. 

My feeling is the positioning of the world’s largest fund managers remains overtly bullish.

Hence, my view that there is still room for a 10% decline this year, perhaps another 20% like last year.

Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities

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