Every article I saw today about Fed Chair Powell’s Jackson Hole speech focused on the idea that raising interest rates will cause “pain” to the economy. This led to a nasty -3.37% scalping of the S&P 500 (SPY) and investors wondered if we’re about to revisit the June lows. 40-year investment veteran Steve Reitmeister shares his thoughts in this new commentary below. Note that Steve is bearish right now.
Someone surprised by Speech by Fed Chairman Powell in Jackson Hole have their heads examined. There are no two ways to do this, as the Fed strives for consistency in its reporting. And they have CONSTANTLY said that inflation is way too high and that they need to be vigilant in waging that battle.
This will cause absolutely, positively”painto the economy. The only question is how much damage it will do. Yes, a soft landing is possible… but a recession is more likely.
So it was crazy that stocks went up on Thursday in this announcement. Like “put on a straight jacket” a little bit crazy.
The sell-off on Friday was a much more sensible and logical response to the facts in hand. However, the final verdict on a soft landing with a bull market versus a recession with a bear market is not fully resolved. So we need to spend some time today looking at the new facts on this topic to chart our investment trajectory.
Let’s kick off this week’s conversation with a quick rundown of key points from my 8/19 commentary:
“For now, I see a consolidation period in which the trading range is forming. The highs were just found on the 200-day moving average (now at 4.321). And the low is probably framed by the 100-day moving average (4,096).
Any movement within this range is meaningless noise. That includes the sale on Friday. Investors are waiting for clear and obvious indicators of whether they are really ready to break into a new bull market. Whether the bear market is still in the lead with a likely return to the June lows, if not lower.
I’m betting on the bearish argument to emerge victorious. Still willing to objectively assess the information as it comes in and turn bullish if necessary.”
Since last week, the moving averages have switched places. With the high represented by the 200-day moving average for the S&P 500 (SPY) is at 4,307. And much more important right now is the low side of the 100-day moving average at 4,074.
Yes, the stock closed even slightly below that 100-day range in the closing minutes of Friday’s rough session. However, the end of the week quite often has exclamation mark movements that quickly reverse the following week as the heads clear up.
For as fundamentally bearish as I am right now (explained most recently in this article: 5 reasons to be bearish) I can’t say with confidence that the rest of the market has turned really bearish. That’s because investors should probably see more evidence of that aforementioned pain in the economic data. Particularly in the area of employment and corporate profits.
Right now, the unemployment rate is at an all-time low, coming from a July reading of more than 500,000 jobs added. Hard to get pessimistic until that base starts to crack a bit more. As a result, investors will be closely watching the government’s employment situation report next Friday morning 9/2.
Weekly Jobless Claims may also contain some clues. That report has been creeping higher since its low in the spring of 2022. But until that hits 300,000 a week, it’s hard to imagine the unemployment rate starting to climb. To be clear, the most recent report came in better than expected with 243,000 new claims.
Now let’s switch to the operating income view. After the most recent earnings season, the growth prospects for the coming quarters have somewhat reversed.
However, turning back to slower growth is quite different from negative growth indicating a recession. So investors will probably have to see a lot more pain in this area before they hit the sell button enough to really break out of this range, tumbling through 4,000 (point of psychological support) and going back to the June lows.
One last idea to share with you today, which came out of a headline on CNBC last Wednesday:
This is an interesting trend to watch as house prices have skyrocketed since Covid came on the scene. Interestingly enough, there are some key economics lessons that would always happen with housing… it was only a matter of time.
First, rising mortgage rates make homes more expensive… which is deflationary for home prices over time. The rise in house prices should therefore stop when it becomes more expensive to borrow. Maybe we’re hitting that wall now.
Second, most consumers have more money at home than in other investments. So they often judge their ability and desire to spend based on the increased value stored in their homes.
Of course this has been positive in recent years, which has led to a strong consumer. But as this new negative housing trend unfolds, coupled with crippling inflation in the price of everything else, it should begin to weigh more heavily on the consumer psyche, hurting future spending, increasing the likelihood of a recession. .
Let’s get it straight…
The market is undecided… but is again leaning more bearish after the Fed’s wake-up call on Friday that fighting inflation should be accompanied by more economic pain. However, until there is more evidence of that pain in employment and corporate earnings, it may be difficult for stocks to go below 4,000.
This coming week offers more clues about the health of the economy. Not only Government Employment on Friday 9/2, but also ISM Manufacturing on Thursday 9/1 and then ISM Services on Tuesday 9/6. Investors will be watching this closely…and you should too.
If you are currently strongly bullish in your accounts, consider becoming more defensive at this time given the increasing likelihood of a downtrend.
And if you are loaded to the teeth with short positions… consider being more careful because if these upcoming reports are positive we could sprint higher within this trading range… like back to the 200 day move average at 4.307 .
What to do?
Discover my hedged portfolio of exactly 10 positions to help generate profits if the market falls back into bear market territory.
And yes, it ended firmly in the plus column this Friday as the S&P fell -3.37%.
This is not my first time using this strategy. In fact, I did the same at the start of the Coronavirus in March 2020 to generate a return of +5.13% in the same week the market fell nearly -15%.
If you are completely convinced that this is a bull market… just ignore it.
However, if the bearish argument shared above makes you curious about what happens next… consider my “Bear Market Game Planwhich contains details of the 10 positions in my hedged portfolio.
I wish you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total return
SPY shares fell $1.16 (-0.29%) in after-hours trading on Friday. Year-to-date, the SPY is down -14.03%, 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.