The market has rallied hard after a third foray to or below the 200 day moving average. It definitely looks and feels bullish at first glance. I must admit to being surprised that the annual tax windfall rally has come back to life here in mid-May. That’s more a factor of my own bearishness than it is of history, however. The annual tax windfall rally typically persists until mid or late May, even in bear markets. In that respect, this rally is not at all unusual.
Here’s why you should not get too excited about possibly chasing this rally. Rule Number One, the first commandment of investing, has not been repealed. “You shall not fight the Fed” still rules, and the Fed is very much on course to continue tightening.
Even by the deeply flawed and misleading measure, the CPI, inflation is at the Fed’s target. By other measures that more accurately portray inflation, it is well above target. The Fed will not be deterred from continuing to tighten, that is to remove money from the system, just because of the silliness that CPI missed expectations. It’s still at least 2%, and it’s heating up.
Furthermore, as the Fed raises the Fed Funds rate target, it will only stimulate more inflation. The Fed will be behind the curve, because the Fed is always back there pushing it ahead. Every time it raises the Fed Funds target rate, the Fed signals the decision makers in the US economy that it expects more inflation. Consumers and businesses behave accordingly. I showed you the history of that a couple of weeks ago.
And the fact is that we really have more inflation than they’re telling us.