The Growing Disconnect Between Economic Reality and the Market By Larry Benedict, editor, The Opportunistic Trader Almost every other day, the major indices break out to new all-time highs. Both the Nasdaq and S&P 500 have now surpassed their peaks from November 2021 (Nasdaq) and January 2022 (SPX). They are already up around 11% and 9%, respectively, from their January lows. All this comes despite the Fed’s 11 rate increases that pushed up the Fed funds rate by a massive 500 basis points (bps). Even negative economic news has failed to make any real dent in the market’s march higher. As we discussed two weeks ago, we initially saw a dip after January’s 3.1% inflation print (0.2% above forecast). But the markets roared back to life, erasing all of their losses in just two days. And they’ve continued to rally since… This growing disconnect between the markets and economic data appeared again this week… On Tuesday, durable orders dropped 6.1% month-over-month (MoM) for January. That’s a bigger fall than the -4.5% forecast. That’s also way bigger than the 0.3% drop in December. It also marked the biggest slump in durable orders since April 2020. A big contraction can mean that consumers and businesses are nervous about their future and the economy. It also follows the weak January retail sales we saw (down 0.8% MoM). That was far worse than the 0.1% drop the market was expecting after the 0.4% rise in December. But the other data that caught my attention was the core personal consumption expenditures (PCE) price index (which excludes food and energy) that came out yesterday. It rose 0.4% MoM in line with forecasts… but was a big jump from November and December’s 0.1% prints. You can gauge the size of that jump in the chart below… U.S. Core PCE Price Index (MoM) 
Source: Tradingeconomics.com, U.S. Bureau of Economic Analysis With many food prices still rising and volatile oil prices, it won’t take much for inflation to become a major headache for the Fed again. That would push out the return of its 2% inflation target even further — if it can get there at all. This means the much-anticipated rate cuts this year could be smaller in number and further out than the market is expecting (as I’ve been saying since last year). Although we haven’t yet seen a macro event that will trigger a fall, the market is still looking vulnerable… Apple (AAPL), the biggest stock on the market (and a key driver of the Magnificent 7), is struggling to gain any momentum. It’s currently trading where it was in May last year. And the rest of the Magnificent 7 is also now priced for perfection. So it will only take a small macro jolt or change in the market’s narrative to set off a reversal. At this point, that likely won’t be enough to bring back our Nvidia puts since they’re fast approaching expiry (March 15). But it could provide the setup for other mean reversion trades down the track. In the meantime, we’ll continue to monitor the market and economic data closely. So stay ready to act when the next setup comes our way. Regards, Larry Benedict
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