Last week the reports showed a higher-than-expected inflation number. We were expecting a 0.1% decrease but instead, we got a 0.1% increase. That doesn’t sound like a lot but when other things are factored in, such as energy prices being down 5% thanks to a decrease in gas prices, it was a big increase. The driving forces of this are food prices, rent prices, medical services, and operations services. Operations services are coming back into the picture but with higher prices. The Fed is definitely focused on this number because it was a negative surprise for it to be higher than expected. The Fed is going to be watching that closely, which could change expectations from a 50-basis point hike to possibly a 75 or 100-basis points hike.
As volatility remains the story, we continue to look back in history to see how the market has performed in similar situations. A chart that continues to interest us is the average stock decline chat. With the S&P 500 down 18% since January 1st, the average stock has actually declined 25%, which is why active management has been crucial this year. The average stock is near the minus two standard deviation level, which shows performance that is different from the average that is often associated with a bounce up. As you can see on the chart shown in this episode, the dotted red line shows that going back to 1980, the market has bounced to the upside numerous times when stocks have fallen like they have this year. As always, no guarantees, but we’re observing to see if history repeats itself as we get through the Federal Reserve aggressively raising rates again this week on Wednesday. One question we have is will the market bounce higher like we’ve seen before at this level, or will it remain at the levels that you see in the chart shown in this episode for an extended period of time as we saw in 1998 through 2002? If we can bounce higher at these levels, it will be a good sign. It is all about the Fed and how the market reacts to their decision on Wednesday.
We saw a lot of volatility in the markets last week, with the S&P 500 closing on Friday at 3,873. That gives us a new short-term resistance level of 3,900 and a new support level of 3,840. We previously discussed the intermediate to long-term support levels and how they would play out through the end of the year, and we recently saw the market cross through those levels at 3,900. This doesn’t mean that we’re in a bear market by any means, but it does mean that we need to keep a close eye on this over the next couple of months to see if it stays under that price or if it bounces back up. The year-to-date moving day average of the S&P 500 is currently sitting at 4,206, which is close to the long-term resistance level. The market will be important to watch this week with the Fed decision this week, as well as the midterm elections coming up. We want to keep an eye on these items from a technical standpoint to see if we can get some momentum back in the market. It’s also important to note that these pullbacks often create good buying opportunities. We will keep a close eye on the Fed and other market movers to see what these levels look like in the following weeks.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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