The stock market has had a nice rally over the past few weeks and it has been different than the rallies that took place in March and really in July and August as bonds have rallied with the market too. Bonds did have a weak rally in July, but lost momentum ahead of the August stock market peak, which was a huge warning sign for the market. Now the LQD made a new high on the rally this Friday, which is a good sign for stock market bulls.
Bulls believe that the market is rallying because they predict that inflation will go away, to enable a return of the easy money policies of the past. But there is no evidence that inflation is really going to go back to 2% annual CPI and the Federal Reserve itself doesn’t believe that will happen in the second half of next year, as some bulls now claim, as seen in this Axios article.
So, if the bulls are wrong then why is the market rallying?
I’d suggest that traders and funds are doing what they always do and that is front running the day that the Federal Reserve announces that they will stop raising rates. That is likely to come next year in February or March and will setup a classic buy the rumor sell the news situation for the traders for stocks AND bonds when it happens.
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-Mike
