Why this bear market isn't even close to being over…
For much of the last decade, the Fed was desperate to reinvigorate a sluggish labor market, especially from a wage perspective. To that end, it added trillions of liquidity to the global economy, which had side effects of bubbles in all sorts of assets. Yet the Fed almost failed to achieve this goal of a strong and tight labor market until a few years ago. Now the Fed has the opposite problem. He's desperate to cool an overheated economy, and the place for it all is the job market. Yet his aggressive interventions have largely failed to curb wage inflation or even job growth, as evidenced by the latest reading which showed jobless claims falling to a new cyclical low. In today's commentary, I want to focus more on this dynamic and discuss its implications for our portfolio. Then we'll do our usual roundup of relevant market topics. Read below to find out more….
shutterstock.com - StockNews(Please enjoy this updated version of my weekly commentary originally published on September 29, 2022 in the POWR Stocks Under $10 newsletter).
Over the past week, the S&P 500 has fallen 3.1% (SPY). Tellingly, this looks like some sort of "moral victory" for the bulls given the even bigger losses of the past 2 weeks. We even had a couple of nice 2%+ bounce attempts.
But of course these rolled to fall to lower lows. More importantly, we have now broken below the June lows, although there is some hope that the lows have been broken before finishing higher in Tuesday's and today's sessions. p>
On Wednesday, stocks rose more than 2% with big rallies in some of the most oversold parts of the market. However, all of these gains were returned in today's session.
The main driver of the decline was unemployment insurance claims, which hit a new low. Remarkably, the labor market continues to strengthen despite a plethora of challenges and growing signs of economic weakness in various sectors and around the world.
Obviously, this is great news for the economy and the country.
But why is the stock market so bearish?
Well, this is one of those times when we have an economy vs market type situation.
Good economic news is bad for markets, as is bad economic news for obvious reasons. The reason is the Fed's ultra-hawkish stance. Good news means more tightening.
Bad news means earnings are likely to fall, but it's unlikely to lead to lower rates (until inflation drops significantly).
In fact, this is the exact opposite of the dynamic we had in the months following March 2020, when the Fed had an extremely dovish stance. This was another situation where the economy is not the market and the market is not the economic type situation.
The bad economic news prompted a rally in equities, as it meant the Fed was going to ease further and/or for longer. Good economic news was good because it meant earnings would rise, but would not lead to tighter monetary policy or higher rates.
Implications
For the stock market (SPY), the main implication is that… the bear market is not over anytime soon.
The Fed (and the stock market) are caught between a rock and a hard place with no easy options. Killing the beast of inflation seems unlikely without more economic pain.
The headwind of higher rates is quite strong. The best-case scenario for equities is that we have another quarter of economic data and earnings that beat expectations.
That would probably lead to a range-bound market with nice rallies like the one we had in July, but it's far from a bull market.
To get a new bull market, we need a pullback from the Fed and an inflection point in economic data, especially in terms of housing and industrials. Both are unlikely at this time.
In terms of the portfolio, we will do our best to navigate the current situation. The upside is capped and limited, so we need to use bounces and rallies to take profits and unwind. The downside is steep and significant. Overall, risk management is paramount.
Let's think about it this way: going back to a sports analogy, let's say a football team rushes down the field for a game-winning touchdown.
Well, they're going to throw it or hand it over to their best players and use their best games. Now is not the time to go for a hail marie or a flea-flicker. (Of course, there are exceptions.)
The same applies...
For much of the last decade, the Fed was desperate to reinvigorate a sluggish labor market, especially from a wage perspective. To that end, it added trillions of liquidity to the global economy, which had side effects of bubbles in all sorts of assets. Yet the Fed almost failed to achieve this goal of a strong and tight labor market until a few years ago. Now the Fed has the opposite problem. He's desperate to cool an overheated economy, and the place for it all is the job market. Yet his aggressive interventions have largely failed to curb wage inflation or even job growth, as evidenced by the latest reading which showed jobless claims falling to a new cyclical low. In today's commentary, I want to focus more on this dynamic and discuss its implications for our portfolio. Then we'll do our usual roundup of relevant market topics. Read below to find out more….
shutterstock.com - StockNews(Please enjoy this updated version of my weekly commentary originally published on September 29, 2022 in the POWR Stocks Under $10 newsletter).
Over the past week, the S&P 500 has fallen 3.1% (SPY). Tellingly, this looks like some sort of "moral victory" for the bulls given the even bigger losses of the past 2 weeks. We even had a couple of nice 2%+ bounce attempts.
But of course these rolled to fall to lower lows. More importantly, we have now broken below the June lows, although there is some hope that the lows have been broken before finishing higher in Tuesday's and today's sessions. p>
On Wednesday, stocks rose more than 2% with big rallies in some of the most oversold parts of the market. However, all of these gains were returned in today's session.
The main driver of the decline was unemployment insurance claims, which hit a new low. Remarkably, the labor market continues to strengthen despite a plethora of challenges and growing signs of economic weakness in various sectors and around the world.
Obviously, this is great news for the economy and the country.
But why is the stock market so bearish?
Well, this is one of those times when we have an economy vs market type situation.
Good economic news is bad for markets, as is bad economic news for obvious reasons. The reason is the Fed's ultra-hawkish stance. Good news means more tightening.
Bad news means earnings are likely to fall, but it's unlikely to lead to lower rates (until inflation drops significantly).
In fact, this is the exact opposite of the dynamic we had in the months following March 2020, when the Fed had an extremely dovish stance. This was another situation where the economy is not the market and the market is not the economic type situation.
The bad economic news prompted a rally in equities, as it meant the Fed was going to ease further and/or for longer. Good economic news was good because it meant earnings would rise, but would not lead to tighter monetary policy or higher rates.
Implications
For the stock market (SPY), the main implication is that… the bear market is not over anytime soon.
The Fed (and the stock market) are caught between a rock and a hard place with no easy options. Killing the beast of inflation seems unlikely without more economic pain.
The headwind of higher rates is quite strong. The best-case scenario for equities is that we have another quarter of economic data and earnings that beat expectations.
That would probably lead to a range-bound market with nice rallies like the one we had in July, but it's far from a bull market.
To get a new bull market, we need a pullback from the Fed and an inflection point in economic data, especially in terms of housing and industrials. Both are unlikely at this time.
In terms of the portfolio, we will do our best to navigate the current situation. The upside is capped and limited, so we need to use bounces and rallies to take profits and unwind. The downside is steep and significant. Overall, risk management is paramount.
Let's think about it this way: going back to a sports analogy, let's say a football team rushes down the field for a game-winning touchdown.
Well, they're going to throw it or hand it over to their best players and use their best games. Now is not the time to go for a hail marie or a flea-flicker. (Of course, there are exceptions.)
The same applies...
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