This year we have endured 2 impressive bear rallies. First was the 18% rally for the S&P 500 (SPY) from mid June til August. Then after falling to new lows, we saw another 17% bounce from mid October through last week.
This was all quite confusing if you based your decisions on price action alone. However, for those focused on the fundamentals…and those reading the words coming from the lips of Fed officials, it was clear that the continuation of the bear market was never in doubt.
So even though investors were hoping for a serious Santa Claus rally to lift their spirits this week, unfortunately a lump of coal was put in everyone’s stockings.
Let’s review the current market dynamics and what it tells us coming into the new year.
Market Commentary
The most recent bear market rally ended abruptly last week Wednesday as Chairman Powell spoke after the latest Fed rate hike. He could not have been any clearer about this being a long term battle to get inflation back to the 2% long term average.
The “higher for longer” rate mantra that equates to high likelihood of future recession is not new information. Oddly it’s like the bulls tried to play poker with the Fed….calling their bluff.
However, Fed officials are not the bluffing type. In fact, they are the one’s printing the cards…dealing the cards…and will win the poker hand in the end.
To be clear, Powell did concede there are welcome signs of inflation abating in places like commodities. Unfortunately, there are several areas with sticky inflation that won’t be resolved so quickly. In that category, wage inflation is Fed enemy #1.
Sure we all like the idea of higher wages…but not if it comes back to us like a razor blade studded boomerang that slashes our checking accounts with higher prices for everything.
This greater appreciation of the Fed’s resolve to keep fighting inflation with higher rates, and for a much longer period of timely, greatly increases the odds of recession forming in early 2023. And once that Pandora’s box of recession is opened it can take on a life of its own well beyond the control of the Fed.
Meaning we could see an extended period of job cuts that begets a vicious cycle that goes like this:
Job Loss > Lower Income > Lower Spending > Lower Corporate Profits (which leads companies to cut more expenses…which leads to potentially several rinse and repeat cycles)
When you consider the above you appreciate that it is hard to bet on the economic rebound and new bull market until you see just how bad the future recession will be. The shallower the recession…or even soft landing…then the shallower the bear market.
On the other hand, the deeper the recession the much deeper we will have to go on stock prices to find bottom. And yes, for as scary as 3,000 sounds for the S&P 500 (SPY) we could easily find our way below in a worst case scenario.
Add it all up and it pays to be bearish right now. Just not much logic in joining the bull camp until, once again, we see how the economy responds to the Fed slamming on the brakes with higher rates…for a longer period of time.
Heck, their entire goal is to lower demand to lower inflation. That is a fancy way of saying that they would much rather create a recession than leaving inflation in place. This “between the lines” message was repeated several times during the last Powell press conference.
Once again, these guys don’t bluff. And they have printed the cards…and are dealing them out. So likely best to take them out their word and continue to bet on more downside for the economy and stock market coming into 2023.
What To Do Next?
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- Why 2023 is a “Jekyll & Hyde” year for stocks
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- 8 Trades to Profit on the Way Down
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Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
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SPY shares were trading at $382.91 per share on Friday afternoon, up $2.19 (+0.58%). Year-to-date, SPY has declined -18.07%, 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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