The S&P 500 (SPY) moved up and down last week thanks to the Fed’s announcement, followed by the jobs report on Friday. At some levels, the market outlook has not changed. However, looking further into the future, there have been some significant developments this week that increase the likelihood of a recession and a deeper bear market decline. Get the full story in the article below.
There were a lot of economic fireworks last week.
Lots of stock price movement from day to day.
But, unfortunately, little has changed in the short term market. This means uncertainty and a trading range remain the base case until a new catalyst emerges that ends the bull-bear debate once and for all.
However, in the long term, I think the chances of a bearish outcome have increased. So be sure to read the full story below, including our trading plan in this unique environment.
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Now back to today’s market comment…
Let’s start with what we’ve learned this week and then look at how this will affect the outlook for the market and our respective trading plan.
On Monday, May 1, we started the month with the ISM Manufacturing Index, which came out at 47.1. Unfortunately, this figure is well below 50, indicating that the situation is declining. The prospective New Orders component was even worse at 45.7. S&P 500 (SPY) was even on this news.
Then Tuesday 5/2 came 3rd direct monthly drop in JOLTs report (vacancies and employee turnover). In fact, vacancies are now 20% less than a year ago.
This is consistent with the idea that a remarkably robust job market may be finally starting to crack. This is because before you think about laying off employees, you will first stop hiring new employees. This is what the JOLT report starts to convey.
Shares fell -1.16% on the day… partly due to this news… partly due to the fact that some of the profits were withdrawn from the accounts ahead of the subsequent Fed announcement.
Indeed, the Fed’s announcement on Wednesday was the highlight of the week. Everything went according to plan in my book. It’s a quarter-point rate hike with the wording that much more work needs to be done to bring inflation back to the 2% target.
Bulls will point to a clear change in wording that this could be the last rate hike. However, bears can point to claims that even if there are no more rate hikes, they still expect to maintain this high level until at least the end of 2023.
Also, bank weakness is having a negative impact on the economy… which is why they may not need to raise rates anymore. This event is like a rate hike in itself.
Most importantly, their base case still calls for a moderate recession before their fight against inflation is over. This includes a 1% increase in the unemployment rate from 3.5% to 4.5%.
Here’s the problem with this math. Only once in history did unemployment move so strongly and no further. This means that usually when the Pandora’s box of a recession opens, the unemployment rate gets much higher. Thus, predicting only a moderate recession would be somewhat fantastical. The total amount of this negative explains why the stock closed lower on Wednesday and Thursday.
Interestingly, the scenario changed on Friday with a better-than-expected government employment report adding 253,000 jobs (up 30% above forecast). It’s hard to see a recession in these details leading to a spike in stock prices.
However, as sweet as this rose smells, it also has serious thorns. This is above the expected salary inflation of +0.5% per month. This “sticky” inflation rate is 6% per year, which is too much for the Fed, which only reinforces their hawkish resolve…which only reinforces the possibility of a recession.
In its current state, the market remains in limbo. This means a trading range that is neither bullish nor bearish.
I would say the upper limit is 4200, which was strong resistance 2 times (in early February and early May before the Fed meeting). And the lower limit is the 200-day moving average, which is currently at 3970.
Any movement inside the range is meaningless noise and therefore does not change the strategy. A break above is likely to be a signal that a new bull market is approaching us and we will be risking more aggressively. Whereas a break below would force us to consider additional risk mitigation measures.
However, I think the likelihood of a bearish scenario has increased this week due to some of the key concepts that Powell discussed on Wednesday. This is where they are still predicting a recession forming as part of the inflation containment process.
Here again, they predict only a moderate recession with unemployment rising to 4.5%. However, history proves that this is unlikely and will only get worse. Please note that the Fed cannot say out loud:
“Hey, we will destroy the economy and many of you will lose your job. Please”.
Until more investors see this recession taking shape, then there will be uncertainty and the aforementioned trading range. I just want people to understand that the likelihood of a recession and a deeper bear market is now higher given the recent information.
What to do next?
Discover my approach to a balanced portfolio for volatile times. The same approach that has greatly outperformed the S&P 500 in recent months.
This strategy was developed based on over 40 years of investment experience to appreciate the unique nature of the current market environment.
Right now it is neither bullish nor bearish. Rather, it is confused… changeable… uncertain.
However, even in this unattractive environment, we can still chart a course for superiority. Just click on the link below to get started right:
Steve Reitmeister Trading Plan and Best Decisions >
I wish you success in the investment world!
Steve Reitmeister…but everyone calls me Reity (pronounced “Right”)
CEO of StockNews.com and Editor of the Reitmeister Total Return
Shares of SPY traded at $412.63 a share on Friday afternoon, up $7.50 (up 1.85%). Since the beginning of the year, the SPY has gained 8.31% compared to the percentage gain in the underlying S&P 500 over the same period.
About the author: Steve Reitmeister
Steve is better known to the StockNews audience as “Rate”. In addition to being the CEO of the firm, he shares his 40 years of experience investing in Reitmeister Total Return Portfolio. Learn more about Reity’s past, along with links to his latest articles and stock picks.
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