The technical action of the major indexes improved on Thursday, with the S&P 500 regaining its 50-day simple moving average on increased volume. Despite some inflationary economic data, the potential of an additional Fed interest rate hike declined, and hopes of a soft economic landing increased.
The jump in retail sales that was reported on Thursday was largely due to an increase in gasoline prices. Consumers were not rushing to buy more goods. They were forced to pay higher prices for something that they had to buy. That actually is an indication that economic activity is cooling and helped to bolster the case that the Fed may do what it has never done before and engineer a soft economic landing.
The economic narrative has been changing on almost a daily basis recently as each new piece of economic news is sliced and diced. The bulls have embraced a Goldilocks economic scenario in which the Fed has essentially won the battle against inflation, and the lag effect of all those rate hikes is not going to slow down the economy in the months ahead.
The bears believe the Fed may hike rates one more time, but they will be forced to maintain high rates for longer as inflationary pressures fail to abate. They are also very pessimistic about the economy's ability to stand up as bond yields hit multi-year highs and the ramifications of years of inflationary pressure take a toll on consumers that have been steadily losing real buying power.
The economic debate always exists, but the current one is one of the most extreme that we have seen since the bear market of 2008-9. There is no way to know who is right, and that means we have to stay focused on price action as our guide.
The market is going to determine which economic narrative dominates, but right now, it can't make up its mind. The bulls grabbed the advantage on Thursday, but for the last six weeks, there has been no strong trend. The Goldilocks economic view will dominate one day, and then worries about inflation and a slowing economy will rise the next day.
We have a mixed open on Friday as the UAW strike against GM (GM) and Ford (F) begins, but market participants continue to chase ARM (ARM) higher after its successful IPO. The positive reaction to the well-marketed offering is helping market sentiment. In addition, some better economic news out of China is helping as well.
The economic battle continues, and the best way to navigate it is to stay focused on price action.