People say you can’t predict the market’s short-term moves.
But sometimes the market serves you a trade on a silver platter.
At least that’s what the market timers and the folks vying for attention on CNBC thought.
Inflation has been the buzzword in the markets in 2022. The CPI (inflation) report is released monthly. And leading up to October, the S&P had fallen seven out of the nine CPI release days.[i] It’s been an easily discernible pattern. If inflation is hotter than expected the market tanks the day the report arrives. If it’s cooler than expected the market rips.
Naturally, as the markets closed at 4pm EST on Wednesday, October 12th, all eyes were on the CPI report that would be released at 8:30am EST (one hour before markets opened) the following morning. Remember, markets respond to news relative to expectations. 8.1% headline YoY inflation was the expected print.
The big banks do all sorts of analysis leading up to the release of these reports. Legions of MBA grads working 80-hour weeks pour over economic data and spreadsheets trying to determine what the CPI print will be and (more importantly) how the markets will respond. I suspect they probably read tea leaves and consult horoscopes too. No stone unturned.
This, of course, is a lovely value-add for the banks’ clients, right? We employ a horde of Wharton MBAs so we can predict what the market will do tomorrow. That’s the alpha you’re paying for!
Goldman Sachs published their analysis the day before the CPI report was due:[ii]
- Headline CPI YoY 8.2%, S&P loses 3+% on the day
- 8 – 8.2%, S&P loses 1 – 2%
- 7.8 – 7.9%, S&P gains 1 – 2%
- Below 7.8%, S&P gains 3+%
JP Morgan offered their insights:[iii]
- Headline CPI YoY > 8.3%, S&P loses 3+% on the day
- 8.1% - 8.3%, S&P loses 1.5% - 2%
- 7.9% - 8.0%, S&P gains 0.75% - 1.0%
- Below 7.9%, S&P gains 2-3%
Those predictions look suspiciously similar… Lots of consensus on the Street.
8:30am EST rolled around on the big day and the headline CPI number came in: 8.2%[iv]
Inflation hotter than expected. Again.
Goldman said the S&P should lose 1-2% on the day. JPM said 1.5-2%. The trade of the day was clearly anything short the equity markets – go to cash, sell equities short, sell call options, buy put options, etc. That is, attempting to position your portfolio to profit on a negative day in the markets.
The Bureau of Labor Statistics served that trade up on a silver platter.
The market opened sharply lower – close to -2%. Vindication for all those Wall Street MBAs!
Didn’t last long.
The market closed +2.6% on the day.
About that silver platter…
I wrote a post a few months ago about the impact of missing the ten best days in the stock market during the 30 years from January 1, 1992 to December 31, 2021. Miss the 10 best days during that period and you suffer a 54% reduction in your wealth.[v]
I don’t know if this will end up being one of the ten best days of the next 30 years. But I do know it’s been an extraordinarily good day in the markets. It’s pretty easy to miss those great days…
Even when you have a team of Ivy League MBAs.
You can’t predict the market’s short-term moves.
Sean Cawley CFP®
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This commentary reflects the personal opinions, viewpoints, and analyses of Resolute Wealth Management. It does not necessarily represent those of RFG Advisory, clients, or employees. This commentary should be regarded as a description of advisory services provided by Resolute Wealth Management or RFG Advisory, or performance returns of any client. The views reflected in the commentary are subject to change at any time without notice.
[v] “Timing the Market is Impossible.” Client Conversations. Hartford Funds. Data sources: Ned Davis Research, Morningstar, Hartford Funds. February 2022.