The Fed Versus Inflation…

The market environment we find ourselves in is a clear dynamic of the Federal Reserve taking on inflation. The question now is will the Federal Reserve overreach with its interest rate war on inflation? One thing I have learned as it pertains to the markets is not to go against the power of the Fed and to trust they will ultimately steer the ship right.

That being said, what a month to forget for stocks! In the month of September alone the Dow Jones Industrial Average (see chart here) lost almost 9%, the S&P 500 (see chart here) fell over 9% while the Nasdaq Composite (see chart here) and the small-cap Russell 2000 (see chart here) both gave up over 10% in September. I think we are all ready to turn the page on the markets summer performance. In fact, the year to date performance of the major averages are well into bear market territory.

In hindsight it was plain as day how unsustainable asset prices were across the board. From the stock market to the real estate market to the crazy land of cryptos. The excesses that the markets enjoyed while they were hot was a direct reflection of the Fed’s easy monetary policies. From essentially zero percent interest rates, to buying up treasuries and other asset classes to keep the economy strong during Covid, now the markets are paying that price. The head scratcher for me is how long it took the Fed to reverse its course but at least now we can begin to get to normalized rates which is a net positive for all markets.

As I look at the current technical shape of the aforementioned indexes, it’s not a pretty sight. The Dow Jones Industrial Average (see chart here), the S&P 500 (see chart here) and the Nasdaq Composite (see chart here) are at or below their 52-week lows with no technical support yet in sight. The small-cap Russell 2000 (see chart here) is near its 52-week low but does have a bit of support right here. I think we could continue to see some more selling pressure before it’s all said and done but if you are a long-term holder of equities these type of market conditions can create some great opportunities too.

Good luck to all 🙂


Does It Feel A Bit Bubbly?

Do the markets feel a bit bubbly to you? This question is beginning to surface more frequently lately and I think it’s a great question to be asking. The majority of asset classes seemingly have gone straight up without pause over the past several months. Whether it’s the stock market as a whole, the crypto space or one of the hottest trends lately are SPAC’s. What is a SPAC? A SPAC is a special purpose acquisition vehicle that is publicly traded but has no assets other than cash. These vehicles are specifically designed to form as a public company, raise capital and then seek out companies to acquire. For example the electric vehicle space has been one of the favorite sectors for SPAC’s to target over the past year. This is a much easier pathway for private companies to go public without having to go through the time and expense of a traditional IPO.

One of the problems that is happening with the SPAC trade is once they identify a target and move to acquire it, the valuations of these SPAC’s begin to rise steadily into the nosebleed section of the markets. So much speculation is occurring with these SPAC’s institutional and retail investors are willing to pay essentially any price to get on board. Let’s not forget about the day traders that add fuel to the rise in these SPAC’s. So between all of the above and now with interest rates starting to tick up, it’s now wonder we have witnessed over a 1000 point drop in the Dow Jones Industrial Average (see chart here) to close out last week. Now let’s look at the technical shape of the major averages.

The Dow Jones Industrial Average (see chart below), the S&P 500 (see chart here), the Nasdaq Composite (see chart here) and the small-cap Russell 2000 (see chart here) over the past few trading sessions have all dropped below their respective 20-day moving averages and are finding support at their 50-day. Let’s see if these key indices can hold their 50-day moving average support zone this week. If they can the uptrend could very well remain intact, if not, we could see late last weeks selling pressure continue.

Good luck to all 🙂


Does It Feel Bubbly? - Paula Mahfouz