In an article for Proactive Advisor Magazine published at the end of May, U.S. Macro Group head Tony Dwyer addresses the question of what investors should do when heavy macro influences on the market appear unlikely to get near-term resolution.
“Inflation is going to rise due to the base effect from a year ago coupled with the economic recovery,” Dwyer writes, “but the Fed is holding firm on its historically accommodative stance in the belief it is ‘transitory.’” All of this means that what Dwyer describes as the tug-of-war between a rise in inflation and declining rates will continue in the coming months.
Dwyer argues that the Fed “has no intention of tapering asset purchases or raising short-term interest rates despite the rise of inflation expectations.” He adds that, since we’re unlikely to get a near-term resolution, investors should wait for “intermediate-term indicators to reach a level that suggests the confusion is likely priced in.” He suggests tracking the S&P 500 (SPX) stochastic indicator and the percentage of SPX components trading above their 50-day moving averages. At the time the article was published, he notes, the weekly SPX was “overbought,” and the percentage of its components above their 50-day average was “slowly rolling over,” adding that the short-term shifts had been “violent, directionally brief, and unpredictable.”
Dwyer concludes: “While sharp bouts of weakness like those in the past two weeks can draw in enough buyers for a bounce, in our view, the next significant and sustainable move higher needs to begin with a reset, and that has yet to happen.”
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