The S&P500 is on a tear higher. After Nasdaq100 made a new all-time high during the pandemic, it is the SPX’s time to follow. Judging by the looks of it, more upside is possible, especially considering the technical pattern and the Jackson Hole Symposium to start later in the trading week.
Average Inflation Targeting at the Fed
There is chatter in the market that the Fed prepares to announce average inflation targeting instead of the classic target of 2%. What is the difference, one may ask?
Despite being able to create inflation close to the target in recent years, the Fed failed to reach it. That is especially problematic if you consider that the economy ran at full employment in the years prior to the COVID-19 crisis.
Therefore, at the next crisis (i.e., the current one), the Fed knew that it would have limited options. One is to lower the federal funds rate close to zero. It did.
Another one is to restart the quantitative easing program. Check.
But the QE program slashes the yields at the long end of the curve. As such, the Fed might be willing to let inflation overshoot in the short term above the 2% target and bring, in time, average inflation to the 2% target.
This is not a crisis like the previous ones. The exogenous shock received by all economies in the world is not going away that easy. Hence, the secondary effects of the current monetary and fiscal policies will be long-lasting.
The S&P500 trades according to what the USD does. Higher inflation points to a lower currency, and the stock market reflects it. The S&P500 runs at the highs when the M2 in the United States goes vertical. No surprises here.
S&P500 Technical Picture
The recent highs come in the context of a rising wedge. Everyone knows a rising wedge is bearish. But few know that sometimes a rising wedge acts as a continuation pattern.
When the market forms a running triangle, if the price escapes higher, it does not look back for a while. Hence, staying long with a stop loss at 3,300 makes sense for a move towards 4,000. Ideally. Trail the stop with every higher low the market makes.