Why Smart Money Ignored The U.S. Midterm Election
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The S&P 500 added a towering 5.4% yesterday, making this one of the biggest up days in stock market history.
S&P 500 Index Daily Chart
As much as I expected inflation to start moderating, I never expected the market to react in such an oversized way to what was a fairly modest change in inflation. But the trend is everything and Thursday morning’s inflation reading suggests our inflation fever is finally breaking.
Netting out Wednesday’s -2% post-election hangover, we’re “only” up 3.4% from Tuesday’s close, which is still a lot, but a tad more reasonable. And more importantly, Thursday’s gains put the rally to 4,000 back on track. (And at this rate, we could be there this morning.)
As much as bears tried to punish stocks for Republicans’ underperformance in the midterm elections this market isn’t concerned with politics.
Well, it turns out my Wednesday afternoon forecast was a tad premature, but hopefully, most readers can forgive me for being off by a few hours.
As expected, the only thing that matters to this market is inflation and rate hikes and yesterday’s morning’s lower-than-expected inflation reading means the Fed doesn’t need to move as aggressively with future rate hikes.
Sometimes it is better to be lucky than good and Thursday was one of those days. I was fairly certain Wednesday’s election-fueled selloff would fade quickly. What I didn’t expect was Thursday’s historic gains following a “less bad than expected” inflation report, but that’s the way this game goes sometimes. The important thing is recognizing the direction the wind was blowing because we can’t get lucky if we don’t know which side of the street to stand on.