Update - July 12, 2022
Critical Information This Week
Tomorrow will be a very big day for the stock market.
An hour before the opening bell, Wall Street will get its latest look at inflation figures. This month’s reading of the consumer price index will be hotly contested.
On the one hand, the headline figure for June is expected to come in north of 8.6% – even higher than we saw in May.
But on the other hand, it’s the core figure that will tell us so much. This figure, which does not include energy or food prices, is expected to fall from 6% in May to 5.7% this time around.
Any figure higher than those would be sure to push the Fed toward a 75-basis-point hike at its meeting this month. Any number lower (which is what I expect) would remove some of the hawkishness and spark a rally in stocks.
The big question investors must be asking, though, isn’t what the Fed will do this month, next month or even six months from now. What we need to measure is what effect the recent hikes are already having on the market.
In other words… are things changing?
The answer, as I said would be the case way back in January, is a big, fat yes… with an exclamation point!
Big things are changing.
And fast.
These changes are happening far faster than the Fed can react to them. That’s a critical idea to understand.
Home Sweet Home
Take the housing market, for example. For the average person, buying a home is the biggest investment they’ll ever make. The difference between a $1,200 monthly mortgage payment and a $1,600 payment is huge.
That’s $400 each month that could go to other things… like a new car, entertainment or, yes, stock market speculation.
With rates doubling recently – briefly stretching over the 6% mark – big chunks of the economy’s potential energy have evaporated.
Just this week, in fact, I saw data that shows 15% of home purchase deals are being canceled. Neary 1 in 6 deals is getting pushed off the table – the highest rate since the height of the COVID-19 lockdowns.
With rates rising, many folks can no longer afford their new homes. Principal and interest payments are climbing above lenders’ key 28%-of-income threshold.
North of that, banks – wisely – won’t issue loans.
Another reason deals are falling through is buyers are waiting for better rates. With the economy in reverse, they believe they’ll get a better mortgage rate six months from now… and, quite possibly, a better price on their home.
Even with the Fed’s key rate still in bargain-basement territory and only halfway to what many feel will be the peak of this rate-hiking cycle, the effects of tightening are being felt.
And not just in the housing market.
The End Is Near
Computer sales are down. Car sales are falling. And in hard-hit Europe, retail sales are now at lows that we hadn’t seen since the depths of the pandemic.
It all paves the way for what I’ve been saying would come… a fast-moving, rather shallow recession (that many won’t admit exists) and a quick end to Fed rate hikes.
By late fall, the debate won’t be about how high rates will go… it’ll be about how quickly they’ll drop.
We’re foolish to think that an economy that has become addicted to stimulus and easy money will suddenly heal itself and act normally.
It won’t.
We’re already seeing how quickly things fall apart when the needle is pulled from the arm.
For stocks, it means speculation will return. A mere hint of dovishness from the Fed after tomorrow’s CPI figures are released would push things higher.
Ultimately, it’s not good news. The markets are very volatile, and the government must make bigger and bigger moves just to keep things going in the right direction. But that’s a tale for another day.
Right now, we’re here to make money – to keep ahead of the destruction.
Folks will regret missing out on the quick-moving rebound that’s to come.
For an ideal stock to buy right now, see our just-released July issue. It’s getting top ratings from your fellow readers.