Market Needs To Consolidate For A While

The market has overstretched itself since the Election – up 10% in just over two months.

Oil and the December interest rate hikes are what helped fuel the rally.

Now, both are fully priced in. Oil isn’t going up any higher and interest rates are on pause.

Another factor is the post-election euphoria.  

The strongly positive sentiment may have less to do with Trump than with a “waiting to exhale” condition: the Election presented such different candidates that nobody knew what to expect.  Now that the Election is over comes clarity… which should lead to action.

Along those lines, I’m seeing lots of data points that say business activity is perking up.

The only question is whether this is a mini-wave of pent-up demand getting released… or something more sustainable.

So far, the data we track at Moneyball Economics isn’t clear… so we’ll have to wait.

Short-Term Investing Thoughts

The market is looking for confirmation that business is reflating. Inflation is coming fast, And that will be bad for the economy and markets.

Oil prices and healthcare will shove inflation up and will be very visible in the next CPI release on January 18th.  

The concern is that a jump in inflation will lead the Fed to raise rates higher and sooner.

This is not what the market wants and it hasn’t been priced in.

And that’s the key to investing in the next few months: nobody knows what the Fed will really do with short-term interest rates. The rate hike last month was telegraphed for almost six months. Everyone expected it. (That’s why the stock market shrugged it off – although rate hikes are bad for equities, this one was priced in and so it was ignored).

Conversely, the next rate hike (whenever that is) won’t be telegraphed.  

The Fed now has to deal with a fairly antagonistic White House that will use fiscal policy more.

Instead of dominating the policy, the Fed will be reacting to it. This means nervousness in the market. Any data point could suggest the Fed will raise rates…or not.

The stock market will be caught off-guard by the next hike.

Key Takeaway

The good news has been priced in which leaves the market vulnerable.

The vulnerability I am watching is the potential disappointment that could come if businesses continue along their 2016 decision in the second half to capping their spending.