Due for a correction? Despite “good” news?

I expect everyone to read this and think I am a silly bear who doesn’t know what he’s talking about. Inflation is falling, the Federal Reserve is going to hike rates once or twice this year and the US of A is saved.

But let’s look at all the previous crashes in the markets. Things never looked bad, in fact they always looked good. Until something in the financial engineering of the world, broke.

I won’t go over all the “stock market crashes” but we know this to be the case. In the unprecedented world we live in, after the covid crisis so much has happened. So much in fact that a lot of it we don’t know about, and some of the stuff we know about we don’t know what the true intentions of them were like all the investigations by the SEC or the changes to the capital equity markets etc.

Now we are in a place where to a retail investor the market looks ripe for investing. Inflation is coming down, the Federal Reserve will hopefully only hike once again this year. Though BofA still expects two rate hikes.

But is it so simple? Inflation is as the market would say “old news”, “priced in” we know about it. We knew it would fall, and the only real reaction. we would have gotten is if it was rising again. None of this is a surprise. All of this is priced into every model on Wall Street.

Let’s also keep in mind; Inflation has been moderating recently, but the decrease is largely due to outsized jumps in prices last year, which are rolling off year-ago comparisons. Therefore, the surge in inflation last year was followed by a lull, but inflation is likely to re-accelerate toward the end of the summer.

The US labor market remains resilient, giving the Federal Reserve reason to maintain tight monetary policy. Making it even more likely the Fed will hike rates twice more this year which is one time more than the market currently expects.

What is happening in the markets? The correlations? What are they telling us about what happens next?

Inflation in the goods sector has dropped, but the slowdown in orders and reduction in backlogs are affecting employment in the sector.

The US factory sector has continued to slow down, with only four of eighteen industries reporting growth in June. This suggests the goods sector may lead the way into a recession.

Energy and food prices rose in June, contributing to inflation. Housing rents, a major contributor to high inflation, are still rising.

Core inflation, excluding food, energy, and housing rents, remained unchanged in June, showing the lowest monthly reading in nearly two years.

The ISM Manufacturing index has remained in contraction territory for eight consecutive months, indicating a slowdown in the goods sector of the economy.

The trade deficit in goods and services has declined, indicating weakening demand for goods domestically and a trend toward spending on services.

We’re looking at a US Dollar hitting its 15 month lows. The Nasdaq is going to have to perform a “special rebalancing” because the so-called “magnificent seven” are so overvalued that they’re starting to create too much risk for the Nasdaq.

Behind the scenes of all this “inflation talk” we are still seeing tighter lending and regional banks are struggling again. As per the FED Beige Book released yesterday, July 12, 2023. People are also defaulting on their car payments, and this is before the Student Loan Payments come back in full effect.

BofA reported today that total card spending per household by their aggregates credit and debit cards is down 2% YoY. This softness is consistent with the slowdown in non-farm payrolls. They state “The latest data flow pushes back against the notion that the economy re-accelerated significantly in 2Q after the soft patch in March. Instead, we appear to be in a period of below trend economic growth and consumer spending.”

China also today, declared that both their imports and exports growth fell below consensus. June exports contracted further by 12.4% YoY vs the -7.5% previously announced. Import growth also softened to -6.8% from the -4.5% in May. Export growth was weaker “across the board”.

On top of that, despite all of the inflation data we have received, there has been absolutely no deviation from any Fed Speaker even some who are usually quite dovish. We remain with the “higher-for-longer” message, along with the Federal Reserve expectation of 2 more rate hikes this year and rate cuts further away than the market has priced in, according to Jerome Powell. Note the second rate hike has not been priced in to the market, despite not one Fed Speaker deviating from that message.

The market euphoria is creating an inefficiency which will eventually be taken advantage of. As Sun Tzu states, defeat is not brought by yourself, but it is brought on by the enemy. Anyone buying this market is bringing themselves to be defeated because the underlying picture is much more grimy than the media, Joe Biden and his aides, or your friends who also own shares of that “wonderful AI stock” would tell you.