Goldilocks Has Packed Up and Left Wall Street

The market rally that began on Aug. 18 was fueled primarily by soft economic news that raised confidence that the Fed was finished hiking interest rates. Not only was inflation under control, but employment and the economy were strong enough to avoid a recession. The theory was that the economy was not so hot that it would pump up prices, but not so cold that it would cause a significant slowdown.

But that “Goldilocks” scenario lost market support on Wednesday, and the indexes sold off sharply. Breadth was 2,500 gainers to 5,900 decliners, new 12-month lows piled up to around 275 names, and big cap technology names were the downside leaders.

Not only are there signs that inflation may be rebounding, but there are also indications that economic growth is slowing. Retail spending is dropping as Covid savings are rapidly depleting. Oil prices are soaring, interest rates are rising, and the employment market is softening.

Artificial intelligence is supposed to be the economic engine to keep the economy running, but the key AI stocks are faltering, and there has been no expansion of the economic benefits to the broader market.

So far, the selling has been fairly mild, and there isn’t a lot of technical damage, but what is notable is how the narrative about inflation and growth is shifting. The bulls will blame this action on weak September seasonality, but the weak price action is driving a shift in the narrative, and it looks like a theme that can gain traction from here.

The Goldilocks economy scenario didn’t make much sense. The impact of a dozen rate hikes is going to be felt sooner or later. What makes it worse is that inflation is still alive, and the potential for an additional hike is still there.

Buckle up and proceed with caution. We have lost Goldilocks, and it is going to be a bumpy ride.

Have a good evening. I’ll see you in the morning.