The Thanksgiving Rally Should Not Be Trusted

The market rally during the shortened holiday trading week of November 21st-25th should not be trusted just yet.

The Dow Jones Industrial Average rose 1.78% during the week, the S&P 500 increased by 1.53%, and the technology-heavy NASDAQ grew by 0.72%.

The move higher came for several reasons, but none materially changed the economy's outlook over the coming six to twelve months.

The biggest news was from the Federal Reserve. The Fed's meeting minutes from their November 1st and 2nd meeting pushed prices higher after several Fed members expressed interest in slowing the pace of rate hikes during future meetings.

Just the fact that the Fed is talking about reducing the amount of their rate increases is significant, and many economists applaud this move. Economists are happy with this because the Feds policy changes have a lag, meaning it takes time for rate increases to show in economic data reports.

The concern has been the Fed is raising rates too quickly, and by the time the lag sets in, the economy will be in the dumps. So, slowing the pace today is a possible way the Fed can avoid running the economy into the ground. Not running the economy into the ground is the "soft landing" we often hear about when people refer to the Fed and its current policies.

Another catalyst for the recent move higher was the Consumer Price Index in October, which was up 7.7% from a year ago. This was the lowest CPI reading increase since January of this year. But, let's be honest, a 7.7% increase year-over-year is still ridiculously high inflation.

However, many economists are actually saying they are seeing inflation leveling out. We aren't yet seeing that happen with the CPI numbers because we are still looking at year-over-year comparables before inflation got out of control.

The true sign that inflation has slowed, or is still climbing, will be in 2023 when we see year-over-year comps comparing current inflation measures with the elevated inflation we began seeing in early 2022.

Despite all the optimistic news investors got over the last few weeks, when reality sets in, it is easy to see that neither the US economy nor the world economy is very healthy.

Central bankers of every developed country in the world are raising interest rates.

The US dollar is way stronger year-over-year when compared to nearly every major currency, which is not great for the world economy.

GDP growth rates are missing expectations and slowing from where they were a year ago.

And let's not forget Russia and Ukraine are still at war, causing major concerns to the energy markets and the possibility that parts of Europe will run out of natural gas during the coming winter months.

The possible energy crisis and the fact that Ukraine is a major world exporter of grains and other crops is not something that bodes well for lowering inflation in the short term.

Furthermore, we also are seeing Covid-19 cases in China, which is causing factories and even whole cities to go into lockdown.

Many economists believe that a large portion of the inflation we are currently experiencing is due to the supply chain issues we saw happening during the beginning of the pandemic. Therefore factories shutting down again all across China is not likely something that will help slow inflation.

Finally, let's not forget. The Federal Reserve members were talking about "slowing" rate hikes, not yet actually slowing them. And they aren't even starting to talk about stopping them. Let alone reverse interest rates and move them lower. While slowing rate increases is the first sign that inflation may be slowing, we still have a long ways to go until any potential recession or major economic slowdown is in the rearview mirror.

Correct me if I am wrong, but that still doesn't sound very good. It does sound better than before, but not what I would call a good, healthy economy.

I know it sounds like a broken record to say, "there are a lot of negative market headwinds, and therefore you should wait until the dust settles to buy." But I don't understand why people are in such a hurry to buy the dip and call this the bottom.

If you are in such a rush, can't control your FOMO, and must buy into this market, buy small amounts and cost average over the next 12 months. Paying a few dollars more for something in a few months, if this is the bottom, is not going to destroy your investment return. But it could keep you from losing money because this is a fake rally, and the market rolls over again in 2023.

A few personal favorites if you want to start buying today are the Vanguard S&P 500 ETF (VOO), the iShares Core S&P 500 ETF (IVV), or the Invesco QQQ Trust (QQQ) over the next 12 months and don't try to time the market bottom.

Remember, you are investing for decades, so in the long run, the difference between buying today and six months from now won't make that much of a difference to your portfolio two decades from now.

Matt Thalman Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.