In the summer, markets denied themselves the reality that the Federal Reserve would fight inflation.
When Fed Chair Jerome Powell warned the market that it would increase rates to weaken demand,
markets responded.
The S&P 500 (SPY) erased its peak gains from mid-August. It tried again to rally earlier this month only to
back down from the 20-day simple moving average.
Investors will unwind their bet on the Federal Reserve pivot. An interest rate cut will not come before
the central bank pauses rate hikes. For that to happen, it must see jobless rates rising and inflation rates
slowing.
Core inflation increases will take longer to slow. Markets will need to look for the supply chain to
improve. In addition, the recession will slow demand for commodities. This will weaken raw material
prices, including oil and gas.
OPEC+ recently announced it would cut production by 2 million barrels a day. This will result in oil prices
at $80 - $100, despite interest rate increases.
Investors may position for an eventual pivot by holding oil and gas first. Stocks in the consumer goods
space like J&J (JNJ) and Proctor & Gamble (PG) will outperform. They will keep product prices high and
preserve increased profits.
