The market is having a technical pullback which is not to be unexpected after the rally we have seen over the last month or so. The market had its first down week after a strong rally. Macro concerns are high and there is no shortage of bears on the Street. Nerves are high and any pullback is causing a lot of heart burn. The odds of us retesting the July lows are very low and the odds of volatility scaring investors are very high. Pullbacks are buyable but be prepared for some strong moves up and down going forward. Again, this is a very emotional market, and any news is being looked at with a very skeptical outlook. The current inflation rate has not been seen in over 40 years. Also remember that there are almost no living portfolio managers that have been alive in an inflationary environment like we face today.

When inflation is high bonds and stocks are positively correlated, which gives institutions nowhere to run and nowhere to hide. When the environment is disinflationary, or deflationary, the correlation is generally negative. The negative correlation is one of the drivers of the oft cited 60/40 portfolio.

The Chicago Fed National Activity Index (CFNAI) rebounded to +0.27 in July from a downwardly revised -0.25 in the previous month, indicating that economic activity strengthened at the start of Q3. The monthly gain of 0.52 points was the biggest since last October. All four broad categories of indicators improved from the month before and made positive contributions to the CFNAI, led by a solid rebound in manufacturing output.

Nevertheless, the three-month average of the CFNAI, which irons out some of the near-term volatility, was unchanged at -0.09, its second consecutive negative reading, indicating below-trend growth. The CFNAI diffusion index, which is based on 85 individual indicators and is also a three-month average, ticked up 0.03 points to -0.05. Despite its modest improvement last month, the negative reading reflects more weakness than strength across the economy, although not yet at recessionary levels.