The debt ceiling is a side show. Not real theatre. And not a real reason for stocks to move.

The sad fact is we are still stuck in gridlock not knowing if the traffic will flow bullish or bearish from here. In the meantime, investors are willing to trade every little ripple in the water no matter how inconsequential.

What truly matters is the next big wave. Will that be bullish or bearish?

Solving that mystery continues to be the key to future investing success…and thus will be our focus today.

Market Commentary

Last week the narrative was that stocks were running up to the bullish breakout point of 4,200 for the S&P 500 (SPY) on news that a debt ceiling deal was on the way.

Then on Tuesday stocks tumbled a little over 1% as debt talks drag on in typical DC fashion.

Let me tell you how this will play out from here so there is no mystery.

There will be a lot of political theatre between now and the 6/1 deadline. This could include a temporary funding deal so a longer term deal can be crafted after the deadline.

But some way, some how a deal will be made like every time in the past…and every time in the future. Stocks will run higher on that news. Even perhaps topping the 4,200 mark for a brief spell.

Yet when the smoke clears investors are still left with the same conundrum. That being whether a hawkish Fed hell bent on taming inflation will create a recession and deeper bear market…or will that disaster be averted paving the way for more bullish upside?

As you know from my previous commentaries, I see the bearish case as the most likely because the Fed typically talks about creating a soft landing when raising rates…yet failing 75% of the time because a recession did unfold.

This time around they are telling you straight up to expect a mild recession when all is said and done. So, assuming the same Fed margin of error, then a deeper recession is likely on the way. With that will be lower earnings outlooks and much lower stock prices. (Yes, below the 3,491 low set October 2022).

This debate has been at the heart of the trading range scenario we have been dealing with all year long where bulls are making as good of arguments as bears. Their main argument being that a recession keeps NOT happening.

When bulls or bears start making a more convincing case, then the market will swing in that direction. Meaning we are best served looking for the clues that would tip the scales in one direction or the other.

On that front, there were some interesting notes from key Fed officials this week to consider. As a backdrop, lets remember that investors now predict a 80% probability that they freeze rates at this level. Some will think of that as dovish pivot and reason to rally.

The Fed’s Neel Kashkari says…not so fast! Here are the key segments from CNBC’s review:

“Do we then start raising again in July? Potentially, and so that’s the most important thing to me is that we’re not taking it off the table.”

“Markets seem very optimistic that rates are going to fall now. I think that they believe that inflation is going to fall, and then we’re going to be able to respond to that. I hope they’re right,” he added. “But nobody should be confused about our commitment to getting inflation back down to 2%.”

“This is the most uncertain time we’ve had in terms of understanding the underlying inflationary dynamics. So I’m having to let inflation guide me and I think we’re letting inflation guide us. It may be that we have to go north of 6%” on the fed funds rate, he said. “If the banking stresses start to bring inflation down for us, then maybe … we’re getting closer to being done. I just don’t know right now.”

Then on Monday St. Louis Fed President Bullard says he foresees 2 more rate hikes needed to get inflation on course back down to 2%. To be fair, he also thinks the odds of recession are overstated and not a necessary outcome of this process. (Again, lets remember the Fed’s 75% recession outcome when hiking rates.)

Finally, a week ago Fed Governor Bostic said he doesn’t see rate cuts WELL into 2024.

All of these statements fly in the face of current street estimates that September is when investors expect that to happen. I don’t know how many times investors can be wrong in this process as the Fed members have been consistently clear about their intent to keep rates higher for longer with express statements that there will be no rate cuts til 2024.

Now here is the economic catalyst watch I shared in my previous commentary:

5/25 Jobless Claims– This will not be strong enough by itself as investors would look for collaboration from the 6/2 Government Employment Situation report. However, if Jobless Claims start to approach 300,000 per week, then historically that has pointed to the time that the unemployment rate is about to rise for quite a while.

5/31 ADP Employment, JOLTs– 2 other jobs reports that often serve as leading indicators of what is in store with monthly Government Employment Situation.

6/1 ISM Manufacturing, Jobless Claims- there have been MANY weak readings for ISM Manufacturing without truly signaling a recession was at hand. However, this is still one of the key monthly reports to monitor on the health of the economy.

6/2 Government Employment Situation- Job adds are expected to keep ebbing lower down to 180,000 this month. Note that population growth demands 150,000 job adds per month to keep the unemployment rate level. So, any movement under that mark could have investors predicting even worse readings ahead. Also, many eyes will be on the Wage Inflation component as that sticky inflation has been clearly bothersome to the Fed.

6/5 ISM Services– Has been in positive territory at 53.4 last month. But if that cracks under 50 into contraction territory it definitely would increase the odds of a recession ahead.

6/14 Fed Meeting- More investors are expecting that they will pause raising rates. But that is quite different than pivoting to lower rates which they still claim is a 2024 event. So, the Powell press conference that follows the rate hike decision will be closely watched for clues of what comes next.

In closing, I want to make sure that investors do not get sucked into any post debt deal rally. Let the smoke clear from that event to return your focus to the real debate of whether a recession is in the air in the months ahead. This will determine whether stocks rage higher or lower.

The above clues will help you put the pieces together. However, if you struggle making sense of it all, then continue to tune into my commentaries where I will stay on top of the action.

What To Do Next?

Discover my balanced portfolio approach for uncertain times. The same approach that has beaten the S&P 500 by a wide margin in recent months.

This strategy was constructed based upon over 40 years of investing experience to appreciate the unique nature of the current market environment.

Right now, it is neither bullish or bearish. Rather it is confused and uncertain.

Yet, given the facts in hand, we are most likely going to see the bear market coming out of hibernation mauling stocks lower once again.

Gladly we can enact strategies to not just survive that downturn…but even thrive. That’s because with 40 years of investing experience this is not my first time to the bear market rodeo.

If you are curious in learning more, and want to see the hand selected trades in my portfolio, then please click the link below to start getting on the right side of the action:

Steve Reitmeister’s Trading Plan & Top Picks >

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return

SPY shares rose $0.26 (+0.06%) in after-hours trading Tuesday. Year-to-date, SPY has gained 8.69%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...

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