Santa serving coal to stock market investors

The S&P 500 (SPY) comes into Christmas bearish territory below 3,855...20% below all-time highs. Why are stocks falling again? Why doesn't the traditional Santa Claus rally come to the rescue? And where do the stocks go next? Steve Reitmeister, a 40-year investment veteran, explains it all in this timely commentary. Read below for the full story.

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This year we have had 2 impressive bearish rallies. The first was the 18% rally in the S&P 500 (SPY) from mid-June to August. Then, after falling to new lows, we saw another 17% rebound between mid-October and last week.

This was all quite confusing if you were basing your decisions solely on price action. However, for those who focus on the fundamentals...and those who read the words coming out of the mouths of Fed officials, it was clear that the continuation of the bear market was beyond doubt.

So while investors were hoping for a serious Santa rally to lift their spirits this week, sadly, a lump of coal was put in everyone's stockings.

Let's review the current market dynamics and what they tell us as we approach the new year.

Market Commentary

The latest bear market rally came to an abrupt end last week on Wednesday as Chairman Powell spoke after the Fed's latest rate hike. He couldn't have been clearer that this is a long-term battle to bring inflation back to the long-term average of 2%.

The "higher for longer" rate mantra that equates to a high probability of future recession is not new information. Oddly, it's like the bulls are trying to play poker with the Fed...calling their bluff.

However, Fed officials are not ones to bluff. In fact, they are the ones who print the cards...deal the cards...and who will ultimately win the poker hand.

To be clear, Powell acknowledged that there were welcome signs of slowing inflation in places like commodities. Unfortunately, there are several areas where inflation persists that will not be resolved as quickly. In this category, wage inflation is the Fed's #1 enemy.

Of course, we all love the idea of ​​higher wages...but not if it comes back to us like a razor-studded boomerang that slashes our checking accounts with higher prices for everything.

This greater appreciation of the Fed's determination to continue to fight inflation with higher rates, and for a much longer period, greatly increases the chances of a recession forming in early 2023. And once Pandora's box of recession is opened, it can take on a lifetime far beyond the Fed's control.

This means we could see a long period of job cuts that creates a vicious cycle that looks like this:

Job Loss>Lower Revenue>Lower Expenses>Lower Business Profits (leading to businesses cutting expenses further...potentially leading to multiple rinse and repeat cycles)

When you consider the above, you realize that it is hard to bet on the economic rebound and the new bull market until you see how bad the future recession will be. The shallower the recession...or even a soft landing...the shallower the bear market.

On the other hand, the deeper the recession, the more we will have to rely on stock prices to find the bottom. And yes, for as scary as 3,000 sounds for the S&P 500 (SPY), we could easily find our way under in the worst case.

Add it all up and it's worth being bearish right now. There just doesn't make much sense in joining the bull camp until, once again, we see how the economy reacts to the Fed's sharp brake with higher rates...for a while. longer period.

Heck, their only goal is to reduce demand to reduce inflation. It's a fancy way of saying that they would much rather create a recession than leave inflation in place. This "between the lines" message was repeated several times during Powell's last press conference.

Again, these guys aren't bluffing. And they printed the cards... and give them out. So it's probably best to take their word for it and keep betting on more downside for the economy and the stock market by 2023.

What to do next?

Watch my brand new presentation: "2023 Stock Market Outlook" covering:

Why 2023 is a "Jekyll & Hyde" year for stocks 5 warnings signal the return of the bear in early 2023 8 Profitable Trades on the Way Down Plan to melt the fish at the bottom of the market 2 trades with 100%+ upside potential as a new bull emerges And much more!