VGIT - The Stock Market Is Acting Tired
2023-07-18 05:20:00 ET
Summary
- While we made it to fresh 2023 highs on the back of the good CPI numbers released last week, the stock market averages tended to make most of their gains in the pre-market session.
- The S&P 500 has already notably undercut the 50-day moving average twice.
- One reason the market is strong is that it may expect that inflation will decline precipitously by the end of 2023.
While we made it to fresh 2023 highs on the back of the good CPI numbers released last week, the stock market averages tended to make most of their gains in the pre-market session and then mostly meandered with less than feisty energy during the trading day. Friday was an outright reversal day, with both the NASDAQ 100 and the S&P 500 registering fresh highs for the year but closing below where they opened.
One day a trend does not make, but I think we are ripe for a 5% correction, which would be normal and healthy, given the robust advance so far in 2023. On the S&P 500, that likely means a tag of the 50-day moving average. The S&P 500 has already notably undercut the 50-day moving average twice, so if it overshoots, I would say that 4200 would be as much as the index could decline for this to be a normal correction. Any decline past 4200 would indicate a bigger problem, which is premature to speculate on right now, as both the economy and the stock market so far in 2023 have surprised to the upside.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
One thing that bothers me is how the stock market, particularly the tech sector, is ignoring rising yields. It could be that inflation is declining precipitously and the stock market looks forward to yields declining and the Fed cutting rates, even though the Fed says that right now that would not happen until 2024. Whenever it happens, the stock market is acting as if it believes in the soft landing scenario for the economy, even though soft landings are few and far between when one studies Fed rate-tightening cycles.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
One reason the market is strong is that it may expect that inflation will decline precipitously by the end of 2023. We have seen the first recorded shrinkage in M2 money supply since data became available. M2 has shrunk six months in a row (December 2022 through May 2023 - the latest month available).
In remote history, in the 1700s and 1800s, money supply would often shrink when the U.S. was mostly on the gold standard, but we have no way to measure this. Huge swings of 10% to 20% between inflation and deflation were relatively common in those years, driven by the volatility of the money supply and gold supply. My guess is, ceteris paribus ,* that inflation will decline quite a bit more by the end of 2023.
*All other things being equal
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
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The Stock Market Is Acting Tired