Guts Of The Stock Market Is The Best Economist

Inflation Continues to Fall

I prefer the 3-month annualized reading to understand the recent inflation trend.  Today’s U.S. PCE report further confirms that inflation continues to fall.  This may be another data point that helps the Fed take an extended pause from raising interest rates.

Options

The Put-Call index is showing elevated fear.

What is A Bear Steepener?

When long-term interest rates rise faster than short-term interest rates.  This typically happens when economic growth is good, and inflation expectations are picking up.  Today, while growth has been good, the expectations of large Treasury issuance to refinance debt are causing long-end rates to rise. 

Based on the NDR study below, bear steepeners occur only 10% of the time and the market does well (+9.5%) during that time frame. 

Discretionary Vs. Staples

When the consumer weakens, Staples stocks outperform Discretionary stocks. It happens before every recession. Today, discretionary stocks continue to lead. This is a further confirmation that we are in a late cycle without an imminent recession. 

Seasonality

Pre-election seasonality data suggests the correction should end soon and give way to a positive end to the year. The S&P has matched this seasonal chart well so far. Will this continue?

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