The stock market is rallying higher…
Over the past two months, the S&P 500 Index is up roughly 17%. The tech-heavy Nasdaq Composite Index is doing even better. It’s up around 21% in that span.
I’m not scared to check my portfolio anymore. And I’m sure you’re feeling the same way.
But as good as it seems right now, the broad market is still down so far this year. In fact, the S&P 500 would need to rally another 12% to eclipse its early January peak.
Now, I would love to run headfirst back into stocks. I’m guessing most folks would, too.
But I’m waiting for a sign. And not just any sign, either. I’m waiting for the right sign.
Let me explain…
You see, a few “up” days – or even a couple “up” months – in the middle of a bear market can play with your emotions. It might feel like stocks have finally turned the corner.
But don’t get caught up in the euphoria. The “fear of missing out” is very dangerous. And it could lead you to chase returns that might never happen.
Sure, the S&P 500 is up roughly 17% from its mid-June bottom. And yes, three related pieces of economic data did recently point toward a potential solution to our inflation woes…
First, commodity prices cooled in June. Commodities are the raw items that come out of the ground and go into the production of most everyday goods. If the prices of those building blocks are dropping, we can expect the prices of the final products to start going down, too.
Second, the Federal Reserve Bank of New York’s Empire State Manufacturing Survey for August showed that manufacturers are paying less to produce goods. The survey showed a steady decline in prices paid. And they’re now at the lowest level since January 2021.
Finally, the Consumer Price Index (“CPI”) indicated that inflation increased only 8.5% year over year in July. Of course, that’s down from the peak (at least so far) of 9.1% in June.
But the thing is… despite the recent rally, strong headwinds remain as well.
That’s always true in a rough market. And you should pay particularly close attention to one of these headwinds today. It’s the sign I’m waiting for before rushing back into the market.
Not surprisingly, I’m talking about the Federal Reserve. After all, as the saying goes, “You can’t fight the Fed.”
The Fed’s plan going forward is critical…
If the Fed decides to ignore “lags” and continues raising interest rates, it could throw the economy into a painful recession. And if the decline in the CPI over the past month is only because of falling energy prices, then it’s a “fake out” and we’re still at risk of high inflation.
That could push the media into a dangerous frenzy. And if the media decides to change its mind and declare that we’re living through an “actual” recession… investors will panic.
In turn, the market would likely turn lower again. And if that happens, the recent rally would just be another blip in the longer-term bear market.
But on the flip side, if the Fed relaxes its stance a little bit… the good times could continue.
That’s the sign I’m waiting for. It’s the right sign before diving headfirst back into stocks.
Good investing,
Karina Kovalcik
