How funny it was to see traders get it wrong again. They misread the Fed’s 2 p.m. ET announcement, leading to a major 1% rally for the S&P 500 (SPY). Within minutes of Chairman Powell speaking, it dawned on everyone that things haven’t gotten any better…only worse. And so the chances of a future recession and a larger stock decline have increased enormously. This article explains why. Even better, it highlights a game plan and top picks to capitalize on if the market goes lower from here.
After Jackson Hole chairman Powell’s famous speech in August, investors were told the memo that the recent rally was unfounded and time to start selling stocks again. This led me to write this article, Investors: wake up and smell the pain.
Wednesday’s Fed announcement and press conference feel much the same. That is, investors took the lead with a 9% rally in October before Chairman Powell lowered the hammer again.
They say “Fool me once, shame on me… fool me twice, shame on me”.
If that’s true, let’s highlight key elements from the Fed’s recent announcement so you can understand why we’re probably headed for a recession. And why stock prices will go much lower before this bear market ends.
There are so many threads to pull from Wednesday’s Fed statements. At the end of the day, however, the main point emerged at Chairman Powell’s press conference, when he had to admit that the window to create a soft landing had narrowed.
This means it is possible to create a soft landing for the economy. But VERY unlikely.
Let’s not forget that the Fed has a slightly optimistic bias because they don’t want to scare people unnecessarily. And indeed, a soft landing is their preferred outcome. That is to reduce inflation with as little damage as possible to the economy, before growth and prosperity resume.
You could tell that Powell tried to be as honest as possible with his answer, for which he had to admit reluctantly that the window for creating a soft landing had narrowed. That’s because they’ve raised rates so much with little real effect on taming inflation. So how much harder they will have to raise rates to reduce demand, which will most likely lead to a recession.
The S&P 500 (SPY) was up about +1% when his speech began. Within minutes, investors could finally see that there may have been an improvement in clarity in their statements… but no real change in policy. From there, stocks began to go lower. But when Powell announced that the soft-landing window had narrowed… it turned into an outright carnage for stocks ending in a session of -2.5%.
The above is my morning after thoughts that wouldn’t allow me to go back to sleep until I typed it out. The above meaning is what is most important for investors to understand. But there is indeed more to share.
Let’s go back to 2pm ET when the announcement came out.
I watched CNBC intently and couldn’t take my eyes off the movement of stocks with every new comment on the screen. It was really amazing how every positive comment was followed by a rise just seconds later. And any negative comment with a drop in stock prices.
Most commentators said how amazing it was that this pivot took place to discuss the idea of slowing the pace of rate hikes and then pause to watch the “laging effects.” I yelled at the TV”you don’t get it!!!” My wife joked that I was on a mental break.
CNBC economic commentator Steve Liesman gladly reiterated my view that there is indeed an improvement in the clarity of policy steps… This became all the more apparent within minutes of Powell’s prepared speech, outlining many of Jackson’s points. Hole from a few months ago were repeated. That means…
- This is a LONG-TERM struggle to create price stability (closer to target inflation of 2%)
- Won’t weaken too quickly as it could fuel inflation again before the job is done. “It’s premature to talk about pausing.”
- The economy is slowing and labor markets are weakening. That’s because the Fed plans to slacken demand to align with supply. In this way they expect to achieve lower inflation.
All in all, it appears that the Fed is still moving towards a restrictive 5% rate with smaller rate hikes going forward. Followed by a pause at the “delayed effectsof the policy. Some give this idea of a break way too much meaning.
Remember that Fed policy has a 1-2 quarter delayed effect on the economy. So this just makes sense for the Fed to review terms before taking the next step because they fear going too far, which would be even more damaging to the economy.
As mentioned above, the most beneficial Fed statement came in 45 minutes, while many people may have checked out. He was asked if the window has been narrowed to create a soft landing. He unfortunately had to admit that this was the case and the chances of a soft landing are greatly reduced.
Also keep in mind that the Fed sees no real improvement in inflation at this point. Especially true in the labor markets that generate wage inflation. And so the rates will continue to increase. And so the full measure of that policy is not yet visible in the economy.
In my book there is NO WAY to bet on the start of the next long term bull market until investors realize how bad the economy is going to get. That is an event in the first half of 2023 and so much too early to turn bullish.
Again, given that the Fed was late in raising interest rates, they are highly unlikely to create a soft landing. They even admitted so much, which was really the nail in the coffin for stocks on Wednesday.
A hard landing therefore means a recession with a proportional fall in share prices. So the bearish position is unchanged. It’s just a matter of when the rest of the market wakes up to the correlated lowering message in stock prices.
Not just a retest of recent lows. I mean the full degree of pain that comes with a bear market.
Remember, a 34% drop is the average drop for a bear market. That equates to 3,180. However, stock valuations started at record highs… even worse than the technology bubble of 1999. So they may need to fall a little further than 3,180 to find the bottom.
Ultimately, the investment story is as simple as: “Don’t fight the Fed”.
They tell you with a straight face that the chances of a recession are very high.
And trade accordingly with full expectation of lower lows towards stock prices.
What to do?
Discover my special portfolio of 9 easy trades to help you generate profits as the market descends further into bear market territory.
This plan has worked wonders since it kicked off in mid-August, delivering solid gains to investors as the S&P 500 (SPY) plummeted.
And now is a good time to recharge as we hit even lower lows in the coming weeks and months.
If you have successfully navigated the investment waters in 2022, don’t hesitate to ignore it.
However, if the bearish argument shared above makes you curious about what happens next… consider my updated “Bear Market Game Planwhich details the 9 unique positions in my timely and profitable portfolio.
I wish you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Right”)
CEO, Stock News Network and Editor, Reitmeister Total return
SPY shares traded at $370.94 a share Thursday afternoon, down $3.93 (-1.05%). Year-to-date, the SPY is down -21.00%, versus a % increase in the benchmark S&P 500 index over the same period.
Steve is better known to the StockNews public as “Reity”. Not only is he the CEO of the company, 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 selection.