Welcome to Market Mood. This newsletter is kinda like Google Trends of stock market news… on steroids. 📈💉

With the monthly CPI report due out this morning, today’s post is about News Sentiment & Inflation (like a Peter Lynch novel, written in the style of Hemingway).

To make things a bit more fun (& also because idk macroeconomics), this post is a collab with our good friend . He’s a pro Capital Markets Analyst, macro master, and the author of the Running The Tape blog. Enjoy peeps!

INFLATION SENTIMENT

Collab Post with 🙋‍♂️

To put it lightly, inflation in 2021 and 2022 has smoked average citizens out of their hard-earned dollars. If you haven’t noticed inflation, good for you, but you must be living under a rock.

Ever since the economy was injected with five trillion dollars of free money during the pandemic, the price of basically everything has skyrocketed (gas, cars, & yes… eggs)

And while policy makers debated whether or not it was ‘transitory’, inflation grew higher faster. So in a last ditch effort to not let inflation become ‘entrenched’, they started raising interest rates at the fastest rate since the ‘80s. 🔥 And here’s the deal…

Sentiment plays a key role in inflation data. The reason why inflation (and deflation for that matter) is a bad thing for society is not just because people spontaneously act differently, but ‘cause people feel like they need to act differently. That’s sentiment.

People start buying cars faster because they fear car prices will be higher next month. I mean, why not buy today when it feels like the price will be 1% higher thirty days from now?

The Federal Reserve knows this dynamic exists; the very reason they had to act fast was because they let inflation become too entrenched in our everyday lives, and to let that continue spiraling into hyperinflation could easily become catastrophe (ex: Zimbabwe, Venezuela). They had to control the sentiment.

Worsening sentiment about inflation signals that people fear the prices of their purchases will keep increasing and that they need to buy things sooner. Then this higher spending velocity yields higher inflation because of higher demand, and the loop continues.

To see how sentiment & inflation co-mingle, let’s take a look back over the past year…

What Changes Inflation Sentiment

The October CPI inflation print (released in November) marked the first major below- estimate reading in the print since inflation began peaked in June thru August.

As a result, the S&P 500 and Nasdaq both picked up some of the best single day returns ever recorded (for perspective, the S&P 500 has only clipped over 5% in a single day roughly 10 times EVER).

That 5%+ day corresponded to one of the steepest drawdowns in CPI inflation sentiment this year. Inflation got better, investors worried less about future inflation, causing them to pile back into the markets. Alongside with it, sentiment spiked. 👇

S&P Returns vs. ‘Inflation’ Sentiment

To be a bit more precise, looking at rolling one month periods you can see how inflation sentiment has tracked pretty strongly with the market’s returns this year. Investors heavily weight information deemed highly valuable to future investment decisions. 👇

Mentions of ‘Inflation’ in News

The good news (pun intended) for all of us here is that overall news coverage about inflation is declining. Total mentions of ‘CPI’ and/or ‘inflation’ peaked in December and January as 2022 closed out. Now heading into 2023, it seems people will worry less about inflation and more about economic downturn. 👇

How to Trade on Market Sentiment

In short, markets trade with sentiment; sentiment being the weighted average of a series of variables which each individual deems ‘valuable’. In 2020 and 2021, the valuable sentiment variables were jobs & economic growth. In 2022, inflation was the highly valued and highly weighted sentiment variable.

Looking ahead, in 2023 economic growth, corporate earnings, and employed persons will be the highly valued variables. 📊

Find these variables, track their sentiment (using Babbl), and you’re on your way to seeing the future, with ~data~

The good news is you maybe won’t have to worry about prices creeping up on you. The bad news is you still might lose your job. 😅

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How would you rate today’s post?

1. Incredible 🔥🔥🔥🔥🔥

2. Considerably decent 😺😺😺

3. Not your best bro 👎

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

SENTIMENT KEY: 🟢=bullish, 🌑=neutral, 🔴=bearish