The market continues to rally on hopes of a Goldilocks economic environment. Inflation has been dropping and isn't too hot, while the economy is slowing but isn't too cold. There is optimism that the Fed will be able to engineer the proverbial soft economic landing.
This bullish thesis, combined with a high level of skepticism and poor positioning, is propelling the current rally. While earnings have been nothing special, expectations have been low and the positive price action is trapping underinvested bulls and overly aggressive bears.
The bears are scoffing at this action and figure it is just a matter of time before the market comes to its senses. There is a long list of negatives that the market will be forced to recognize eventually, and the Goldilocks economic thesis will go out the window.
After the close on Thursday, there were 24 earnings reports released. Visa (V) was the best of the bunch with a sold beat, while Intel (INTC) disappointed again. Ten of the 24 reports missed earnings expectations, which normally would be a disaster, but the market has already anticipated this poor showing and the reaction is quite mild. Strategists believe it is just a matter of time before the market will be forced to recognize that earnings growth is slowing and multiples are too high. Still, it isn't happening, forcing buyers to put cash to work to avoid too much relative underperformance.
The Fed's preferred inflation measure, Personal Consumption Expenditures, or PCE, will be released here on Friday morning. There is already a near 100% certainty of a 25-basis-point rate hike next week, and there is an 84% chance of another hike of 25 basis points on March 22, but the market is predicting the Fed will go on hold after that and may even cut rates by the end of the year.
Inflation data and the Fed meeting next week likely will shift the rate hike expectations to some degree, which will be the primary market driver. The market is still more worried about inflation than recession, which is why the poor earnings season doesn't seem to have an impact.
Technically speaking, charts are extended and need consolidation, but there is fear of missing out that keep them running.
I'm staying patient and am maintaining high cash levels while I wait for better chart development.
