This hasn’t been a good week for the market.

Going one step further, it hasn’t been a good start for the second half of 2022 either, continuing one of the worst years on record.

However, the last three times the market got off to a similar start, the S&P 500 averaged a 33% rebound in the second half of the year.

Market optimists are quick to point that out.

But even though the market hasn’t been able to replicate that so far… a key support level was tested for the fifth time today… and passed with flying colors.

And that’s despite an onslaught of bad economic news this week.

It started with the VIX flashing a warning sign on Monday

Coupled with an overbought Nasdaq on Tuesday.

You see, the market already dropped 2% going into Tuesday. But all eyes were on Wednesday’s Consumer Price Index (CPI) release, which revealed the market still has some serious and unresolved issues.

First, inflation has accelerated… coming in at 9.1% and beating analyst estimates once again.

But the CPI reports on economic activity for the previous month.

In this case, June saw crude oil fall 5.5%, natural gas 31%, and the CRB Commodity Index 5%.

Yet, the CPI hasn’t picked up the fallout in commodity prices (the next release will be on August 10).

Since the market is forward-looking, the drop in commodity prices should be a good thing. It means inflation will subside.

Except the S&P 500 dropped 2.3% in less than two minutes on the news.

That’s because of two things…

  1. With the CPI report, all hope for a rate hike less than 75-basis points in July is gone. In fact, 100-basis points is now in play.

  2. According to the Fed Fund Swaps market, the market thinks the next time the Fed will cut rates will be sometime in the summer of 2023.

But more importantly, the contribution to inflation is increasingly becoming more than just commodity prices.

Take a look at the chart showing the monthly contribution to inflation from four broad categories – energy, food, goods, and services…


I separated energy (black lines) from the other categories (orange lines) to show that while the narrative is dominated by energy right now… the trend is growing elsewhere.

For example, the cost of shelter rose at the fastest pace in 30 years, contributing to almost half of the total month-over-month increase in inflation.

So, even though energy is cooling off, inflation is still rising.

When it comes to inflation… if it’s not one thing, it’s another.

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Any notion that the Fed will bail out the market this year by slowing down the pace of rate hikes – or even cutting rates if the economy gets worse – is becoming moot.

The only tool they have to fight inflation is rate hikes, and they’ll use it until prices fall – come what may.

Now all this seems very bearish… but the market hasn’t been able to break the S&P 500’s 3750 support level I highlighted in my essay from June 28.

For reference, here’s that chart again…


And that’s with today’s very sobering earnings release from JPMorgan Chase… which served up a lot of red meat to the bears who say analysts have overstated earnings.

This is why the market’s price-to-earnings (P/E) multiple looks so attractive.

If this trend in underperforming earnings continues in other sectors, what seemed like a reasonable P/E multiple for the market will turn out to be just a mirage.

But the market is forward-looking… and holding support is evidence that a lot of negativity has already been priced in.


Eric Shamilov
Analyst, Market Minute

Reader Mailbag

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