The summer rally misconception has been dispelled. All those gains have been wiped off the board and now the S&P 500 (SPY) made a new bear market low to close out September. That’s the past…what should we expect in the future? More importantly, how should we trade the market in the coming weeks and months? This timely market commentary will give you the answers.

September is historically the worst month of the year for the stock market. And September stayed true to form with a -9.4% shellacking for the S&P 500 (SPY).

Now the bear market is -25.6% lower than the all time highs. Because as bad as that sounds, remember that the average bear market decline is 34%.

Perhaps the greatest quirk of last week’s drop to new lows is that it happened even as fairly positive economic news was released. This is a bit of a head scratcher for some… but actually makes a lot of sense in the grand scheme of things.

I’ll explain that conundrum and more in the updated market outlook and trading plan that follows…

Market Commentary

The S&P 500 (SPY) had a strong +2% session on Wednesday. Yet all that joy was quickly wiped off the plate on Thursday. And by Friday, we were exploring new depths of this bear market at 3,585.

The reasons why will seem contradictory at first. But by the end of this article, you will understand how good news is actually bad news for investors right now.

Let’s start with Thursday’s Jobless Claims report, which fell below 200,000. This is proof that the labor market remains very strong.

So why did stocks plunge -2.11% on this apparent news on Thursday?

Because it gives the Fed the green light to raise rates more vigorously to contain inflation with the belief that they would hurt the economy less.

But what many investors know is that employment is a momentum-based concept. And that once it starts to go bad… even if it is a little… it keeps rolling in that negative direction for a long time.

This is another way of saying that most investors don’t fully trust the Fed to manage a soft landing. That’s certainly true with history as their guide that it’s very difficult to achieve, especially if you’re late to the party trying to contain inflation. (Which is definitely the case here).

So if you are late, you need to act fast with bigger rate hikes every time. This goes against having a metered approach which is more likely to have a soft landing.

Another good news is that the bad news situation came on Friday as the strength of the Personal Income & Outlays report showed extremely robust spending in the economy. So good that it single-handedly pushed the Atlanta Fed’s GDP Now model from an estimate of just +0.3% growth for the third quarter to +2.4%.

Sounds great… right?

Wrong!

Let me explain the negative pattern that normally arises from periods of high inflation. When people become afraid of how much the prices will be in the future, they are forced to run out and spend more money now.

That increased demand in the present becomes reduced demand in the future, causing a recession.

In fact, you could almost say that with inflation, the economy is almost looking at its strongest before falling off a cliff. This image of raging inflation followed by recession and bear markets tells that story very clearly. (blue line = inflation rate and gray bear indicate recessions that coincided with bear markets).

With all that negativity said…I wouldn’t be surprised with a relief rally next week just because the recent bear run has probably exhausted itself. Perhaps a bounce of 3-5% can be expected in early October. But don’t count on another INSANE 18% bounce like we saw in July and August.

The above is what makes sense from a short-term price action standpoint. However, this train is still controlled by the economic situation. That’s how high inflation leads to recession and a bear market.

Therefore, there will be a lot of focus on the parade of economic data that kicks off each month. Here is the current slate.

10/3 = ISM Manufacturing (Today’s very weak Chicago PMI predicts increased weakness in this vital monthly report)

10/5 = ISM services likely to show an increase, as we saw from the higher spending in today’s Personal Income and Expenses report. But as said… that’s not necessarily a positive thing. We also get ADP employment, which is usually more accurate than the government report in detecting trend changes.

10/7 = Government employment situation for September. Oddly enough, this report could be negative no matter what. If it’s too strong, as with Jobless Claims last Thursday, it could scare investors that the Fed will be overly aggressive with rate hikes. On the other hand, if it starts to show weakness, it increases the likelihood of a recession and thus the bear market’s downward trend.

Bear markets are a process that typically takes 13 months to reach a lasting bottom before the next bull market comes along. This one seems pretty well on track with that average time frame, as many expect the recession to hit in the first quarter of 2023.

That will likely lead to a sell-off to the bottom. Then value-oriented investors will bottom out for the ultimate return of the economy. This is what spawns the next bull market. And that’s why we often say “it is darkest before dawnin that investors start buying stocks when the economy is at its ugliest.

Long story short, we are still in a bear market. And probably no bottom found yet. Act accordingly.

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, yielding gains of +4.65% as the S&P 500 (SPY) fell more than 15%.

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 “Bear Market Game Planwhich details the 9 unique positions in my timely and profitable portfolio.

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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 rose $0.70 (+0.20%) in after hours trading Friday. Year-to-date, the SPY is down -23.93%, versus a % increase in the benchmark S&P 500 index over the same period.

About the author: Steve Reitmeister

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.

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