Oh no, why do people get so scared when they hear the word “correction”? It’s like the end of the world when the market drops a few percent. But corrections are actually necessary and healthy for the market. They help reset things when technical conditions get overheated and valuations get too high. It’s been a while since we’ve had a correction, and a higher-than-expected CPI read might just be the trigger stocks need to sell off.
Last week, we talked about the payroll report, and it was pretty much in line with expectations. The economy added fewer private sector jobs than expected, but the unemployment rate went up slightly. This shows that the labor market is slowing down without showing signs of real trouble. This is actually good news because it brings us closer to a rate cut in September. In fact, there’s a high probability that the Fed will cut rates at the next FOMC meeting in September.
The next thing to watch out for is the CPI number coming out this Thursday, as well as the start of earnings season. If inflation continues to improve, earnings are better than expected, and a rate cut is on the horizon, then things are looking good for high-quality stocks and other risky assets. However, we should be prepared for a possible pullback due to high technical conditions and valuations.
The technical indicators are all pointing to an overbought market, which means a correction is likely coming soon. The SPX is about 15% above its 200-day moving average, and indicators like the RSI and CCI are elevated. A 5% to 10% pullback could happen at any time, especially if there’s a catalyst like higher inflation, worse earnings, or decreased rate cut expectations.
Speaking of inflation, the market is expecting the CPI to drop slightly in June. A lower CPI number would be good for the market, but if it comes in higher than expected, we could see that correction everyone’s been talking about. However, it’s important to note that the CPI may not be the best measure of inflation, as it focuses on things like rent and alcohol prices. Truflation, on the other hand, shows that inflation is actually below 2%, which is a good sign for a potential rate cut.
The likelihood of a rate cut in September is now at 77%, which is significantly higher than it was a month ago. This chance could increase even more if the CPI number is lower than expected. Earnings season is also starting, with big companies like JPMorgan Chase, Wells Fargo, and Citigroup reporting this week. Strong earnings and positive guidance could keep the rally going, but disappointing results could lead to a correction.
Overall, while there are risks to the current rally, the long-term bullish thesis remains intact. The economy is strong, and there are growth opportunities in sectors like technology and AI. With the Fed likely to cut rates soon and corporations continuing to be profitable, there’s a good chance that the market will keep going up. So despite some potential turbulence in the short term, I’m staying positive on stocks in the long run.
