The S&P 500 (SPY) is entering Christmas in bear market territory below 3,855…20% below all-time highs. Why are the shares falling again? Why doesn’t the traditional Santa get-together come to the rescue? And where are stocks going? 40-year investment veteran Steve Reitmeister lays it all out in this timely commentary. Read on below for the full story.
This year we endured 2 impressive bear rallies. The first was the 18% rally for the S&P 500 (SPY) from mid-June to August. After falling to new lows, we saw another 17% rise from mid-October to last week.
This was all quite confusing if you based your decisions on price action alone. But to those who focused on the fundamentals… and those who read the words from the lips of Fed officials, it was clear that the continuation of the bear market was never in doubt.
So even though investors hoped for a serious Sinterklaas rally this week to cheer them up, unfortunately a lump of coal was put in everyone’s stocking.
Let’s take a look at the current market dynamics and what they tell us in the new year.
The most recent bear market rally came to an abrupt end last Wednesday when Chairman Powell spoke after the Fed’s latest rate hike. He couldn’t have been clearer about the fact that this is a long-term battle to bring inflation back to its long-term average of 2%.
The “longer higherrate mantra equating to a high probability of future recession is not new information. Oddly enough, it’s like the bulls were trying to play poker with the Fed…by bluffing.
However, Fed officials are not the bluff type. In fact, they are the ones who print the cards…deal the cards…and will ultimately win the poker hand.
To be clear, Powell did admit that there are welcome signs of declining inflation in commodities, for example. Unfortunately, there are several areas of sticky inflation that won’t be resolved any time soon. In that category, wage inflation is Fed enemy #1.
Sure, we all love the idea of higher wages… but not when it comes back to us like a razor-studded boomerang that cuts through our checking accounts with higher prices for everything.
This greater appreciation of the Fed’s determination to continue fighting inflation with higher rates, and for a much longer period of time, significantly increases the likelihood of a recession forming in early 2023. of itself far beyond the control of the Fed.
This means we could see a long period of job cuts creating a vicious cycle that goes like this:
Job Loss > Lower Income > Lower Expenses > Lower Operating Profits (leading to more cost savings for companies…potentially leading to multiple flush and repeat cycles)
Considering the above, you realize that it is difficult to bet on the economic recovery and the new bull market until you see how bad the future recession will be. The shallower the recession…or even soft landing…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 a bottom. And yes, for as scary as 3,000 sounds for the S&P 500 (SPY) we could easily find our way down at worst.
Add it all up and it pays to be bearish now. It just doesn’t make much sense to join the camp of the bulls until we see again how the economy responds to the Fed slamming the brakes with higher rates… for a longer period of time.
Heck, their whole goal is to lower demand to lower inflation. That’s a fancy way of saying they’d much rather create a recession than let inflation. This “between the lines” message was repeated several times during the last Powell press conference.
Again, these guys are not bluffing. And they printed the cards… and handed them out. So it’s probably best to take them at their word and keep betting on more downsides to the economy and stock market in 2023.
What to do now?
Check out my brand new presentation: “Stock market outlook for 2023” covering:
- Why 2023 a “Jekyll & Hyde” year for shares
- 5 warnings indicate the bear will return in early 2023
- 8 trades to make a profit on the way down
- Plan to Bottom Fish @ Market Bottom
- 2 Trades with 100%+ upside potential as new bull emerges
- And much more!
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
SPY shares traded Friday afternoon at $382.91 per share, up $2.19 (+0.58%). Year-to-date, SPY is down -18.07% versus a percentage increase in the benchmark S&P 500 index over 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 company, but he also shares his 40 years of investing experience in the Reitmeister Total Return Portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.