Last week we talked about how it felt like deja vu as the S&P 500 (SPY) embarked on its third bear market rally of the year. Well, today it feels even more so as the market is quickly returning these hard-won gains. The market is down 4% from yesterday’s short spurt, when the FOMC appeared to approve a slowdown in the pace of gains. But these hopes were crushed at the press conference when FOMC Chairman Powell opposed the idea and stuck to his aggressive tendencies. He even said the final rate could go much higher, which was the catalyst behind the sell-off. In today’s commentary, I would like to break off the Fed meeting and then discuss why it is a bearish trend for the market and a confirmation of our bear market thesis. Read on below for more information….
(Enjoy this updated version of my weekly commentary originally published on November 3)rd2022 in the Newsletter POWR Shares Under $10).
For the past week, the S&P 500 (SPY) fell by 2%. And it’s a brutal end to the bear market rally. In fact, it’s more obvious when we look at the Nasdaq 100, where 2 of the market’s generals were slaughtered and destroyed – GOOGL and META.
The index has already returned about 75% of its bear market rally gains. In contrast, losses for the Russell 2000 and S&P 500 are much more moderate.
This is a sequel to a theme we discussed last week – the ‘stock market’ holds up much better than the stock market.
And it shouldn’t be too surprising given the rise in long-term interest rates, which is more of a headwind for large- and mega-cap stocks.
The rate hike could ease if the market (or the Fed) sees some weakness in inflation data or the economy. That does not seem to be the case, although tomorrow we will hear more about the state of the labor market.
But so far, there’s been no evidence of a really broad employment weakness (based on unemployment claims), meaning rates will be “higher for longer.”
Why the FOMC was so bearish for the markets
One of the reasons behind the bear market rally was the belief that the Fed was about to “turn around” in terms of slowing the pace of rate hikes and eventually stopping sometime in early 2023.
Well, this is now in doubt, as the stubbornness of inflation and, in particular, core inflation makes it clear that the gains will continue for a meaningful period of time.
Now we are back to the original conditions that made January 2022 so bearish. Rates are rising, while growth is slowing. But growth isn’t slowing down fast enough for the Fed to spin.
So rates will continue to rise until the economy breaks or inflation breaks.
Rising rates are a powerful headwind for the stock market. As we have learned this year, the most bullish scenario is a choppy sideways market taking some nice rallies from oversold conditions.
While the most bearish scenario is that the S&P 500 (SPY) drops lower when we get the combination of rising interest rates and negative news on the earnings or economic front.
Now that this period of bullishness is over, I expect reality to set in in the coming weeks and the market to visit lower levels.
We are back in a neutral environment and are prepared to take more action if the market breaches significant downside levels, including the October lows of around 3,600.
I would expect cyclical stocks to lead downward, while defensive stocks and sectors would outperform.
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All the best!
Chief Growth Strategist, StockNews
Editor, POWR Shares Under the $10 Newsletter
SPY shares traded at $373.35 a share Friday morning, up $2.34 (+0.63%). Year-to-date, the SPY is down -20.48%, versus a % increase in the benchmark S&P 500 index over the same period.
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR growth and POWR Shares Below $10 newsletters. Read more about Jaimini’s background, along with links to his most recent articles.