Investors: Wake up and feel the pain

Every article I read today about Fed Chairman Powell's speech in Jackson Hole focused on the idea that raising rates would cause "pains" for the economy. This triggered a nasty scalping of -3.37% from the S&P 500 (SPY) and had investors wondering if we are about to revisit the June lows. 40-year investment veteran Steve Reitmeister shares his insights in this new commentary below. Note that Steve is bearish at the moment.

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Anyone surprised by Fed Chairman Powell's speech in Jackson Hole should have their head examined. There's no two way about it, as the Fed aims for consistency in its messaging. And they ALWAYS say inflation is way too high and they need to be vigilant in this battle.

This will absolutely, positively cause "pain" to the economy. The only question is how much harm it will do. Yes, a soft landing is possible...but a recession is more likely.

So going along with that announcement on Thursday was crazy. Like "putting on a straitjacket" kinda crazy.

Friday's selloff was a much more sensible and logical reaction to the unfolding facts. However, the final verdict on soft landing with a bull market versus recession with a bear market has not been fully resolved. So we need to spend some time today reviewing the new facts on this to chart our investment path.

Market Commentary

Let's start this week's conversation with a quick review of the key points from my 8/19 comment:

"For now, I see a period of consolidation with the formation of a trading range. Highs have just been found at the 200-day moving average (now at 4321). And the low side is probably framed by the 100-day moving average (4096).

All movement within this range is meaningless noise. This includes the Friday sale. Investors are waiting for clear and obvious indicators to know if they are really ready to enter a new bull market. Or if the bear market is still in charge with a likely return to June lows or even lower to follow.

My bet is on the bearish argument to emerge victorious. Yet ready to objectively consider information as it comes in and become optimistic if necessary."

Since last week, the moving averages have changed places. Now, the top represented by the 200-day moving average for the S&P 500 (SPY) stands at 4,307. And much more important right now, the bottom of the 100-day moving average is at 4,074. p>

Yes, stocks actually closed a little below that 100-day range in the closing minutes of Friday's tough session. However, the end of the week quite often features exclamation point movements that are quickly reversed the following week as lighter heads prevail.

For as fundamentally bearish as I am right now (most recently explained in this article: 5 Reasons to be Bearish), I can't say with sufficient conviction that the rest of the market has truly tipped lower . Indeed, investors probably need to see more evidence of this aforementioned pain in economic data. In particular, in the areas of employment and corporate profits.

Right now, the unemployment rate is at historic lows and coming off a July figure with more than 500,000 jobs added. It's hard to be pessimistic until that foundation starts to crack a little more. This is why investors will be closely watching the government's employment situation report next Friday morning 9/2.

Weekly jobless claims may also contain clues. This ratio has been skyrocketing since hitting lows in the spring of 2022. But until it tops 300,000 a week, it's hard to imagine the jobless rate starting to rise. For clarity, the most recent report is better than expected with 243,000 new claims.

Let's now turn to the picture of corporate profits. After the last earnings season, the growth outlook for the coming quarters has deteriorated slightly.

However, returning to slower growth is very different from negative growth that signals a recession. So investors will likely have to see a lot more pain in this area before they hit the sell button enough to really break out of this range, drop through 4,000 (psychological support point) and back to the June lows. /p >

One last idea to share with...