Santoli: Stocks are in the 'prove it' zone as traders gauge latest inflation expectations data

Published Tue, Jun 28 20221:12 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. The market remains in the "prove it" zone. The maximum 8% gain off the mid-month low so far is contained within "routine oversold bounce" parameters, as investors look to secondary economic metrics to gauge the reliability of the "peak inflation" and "soft landing" story lines. Initial upside follow-through reversed hard after 10 a.m. data sent a message of dim consumer spirits and wobbly Richmond Federal Reserve manufacturing trends. Combined with surging inflation expectations, New York Fed President John Williams asserting the Fed can get toward a 4% Fed funds rate next year reminded investors of the twin rocks — caustic inflation and a recession — that the market is trying to navigate between. For now, it's a quiet pullback below the 3,900 level, stopping after its first encounter in weeks with the S & P 500's 20-day average (which often contains bounces in down-trending markets). It wouldn't be alarming at all to revisit the area just above 3800, a prior low of some importance, before re-attempting a recovery move. The fixation on survey-based consumer inflation expectations is a bit of a stretch because these have never been reliable forecasts or market-moving factors, but Fed Chair Jerome Powell freighted them with some significance when he cited the University of Michigan inflation expectations the week before last as cover for his super-sized rate hike. So stocks rallied Friday in small part because those were revised lower, and today a record high in Conference Board inflation projections was part of the data dump that seemed to draw out the sellers. Note that this reading simply tracks gasoline prices — there are massive spikes in 2008 and 2011 as oil surged past $100. That was in a prolonged deflationary bust and subpar disinflationary recovery, so it's hard to say it tells us much about what's to come. Treasury yields are not doing much with it, but there's some modest curve-flattening. The same survey asks about expectations for stock prices, which has entered plunge mode. Like many such indicators, current levels have been great buying opportunities – except when we've been in a calamitous, multiwave, multiyear bear market associated with a recession as in 2008 and to a lesser degree 2001-02. Goldman Sachs joined Morgan Stanley in flagging the risk that projected corporate profit margins are too high. Probably so. But note that the average S & P 500 stock fell more than 30% from its peak, and the equal-weight S & P forward P/E is down from 20x to 14x in a year — pretty good hints that the market is gearing up for downside earnings risk no matter what's in the consensus numbers. We may not be all the way there, and a recession is not likely fully priced in, but much of the work has been done in resetting fundamental expectations lower. Commodities got a bounce on China reopening and dip-buying in energy. It's not clear the China lockdown was enough of a comprehensive overhang to make its end an enduring bullish catalyst, but it should help on the growth and supply-chain fronts. Big picture, we can say the market has been burning up a historic level of investor pessimism as fuel for this bounce — there's plenty more to go if news flow cooperates. Almost no one seems to think the June low will hold, which doesn't mean it will, but it shows again that much hope has been wrung out of the market. Credit markets still colicky, junk spreads leaking wider again today. Evidence of the Fed's desired financial-condition tightening, not yet to a critical systemic threat level. Market breadth isn't bad at all for a down-1% session, 50-50 on NYSE, slightly weaker on Nasdaq. VIX hanging in the 27s, in a prolonged period of unease without outright panic. Prior good bear-market bounces have run their course with VIX getting down into the low-20s this year, for what that's worth.