Investors: Wake Up and Smell the Pain

Anyone surprised by Fed Chairman Powell’s speech at Jackson Hole should have their head examined. No two ways about it because the Fed aims for consistency in their messaging. And they have been CONSISTENLY saying that inflation is way too high and they need to be vigilant in fighting that battle.

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

Thus, for stocks to rally on Thursday into this announcement was crazy. Like “put on a straight jacket” kind of crazy.

The sell off on Friday was a much more sane and logical reaction to the facts in hand. However, the final verdict on soft landing with bull market vs. recession with bear market has not been fully resolved. So we need to spend some time today reviewing the new facts on this subject to chart our investment path forward.

Market Commentary

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

“For now, I see a consolidation period with trading range being formed. The highs were just found at the 200 day moving average (now at 4,321). And the low side is likely framed by the 100 day moving average (4,096).

All moves inside this range are meaningless noise. That includes the Friday sell off. Investors are awaiting clear and obvious indicators of whether are truly ready to breakout into a new bull market. Or whether the bear market is still in charge with a likely return to June lows if not lower to follow.

My bet is on the bearish argument to emerge victorious. Yet prepared to objectively review the information as it rolls in and become bullish if need be.”  

Since last week the moving averages have changed places. Now the high represented by the 200 day moving average for the S&P 500 (SPY) stands at 4,307. And much more important at this moment the low side of the 100 day moving average is at 4,074.

Yes, stocks actually closed a little below that 100 day range in the final minutes of the rough Friday session. However, the end of week quite often has exclamation point moves that are quickly reversed the following week as clearer heads prevail.

For as fundamentally bearish as I am at this time (most recently spelled out in this article: 5 Reasons to Be Bearish) I can not say with proper conviction that the rest of the market has truly swung bearish. That is because investors probably need to see more proof of that aforementioned pain in the economic data. In particular, in the areas of employment and corporate earnings.

Right now, the unemployment rate is at historically low levels and coming off a July reading with over 500,000 jobs added. Hard to get pessimistic until that foundation starts to crack a bit more. That is why investors will be closely watching the Government Employment Situation report next Friday morning 9/2.

Weekly Jobless Claims may also have some clues. That report has been creeping higher since setting lows in the spring of 2022. But until that gets above 300,000 a week, then hard to imagine the unemployment rate starting to head higher. For clarity, the most recent report came in better than expected at 243,000 new claims.

Now let’s switch over to the corporate earnings picture. After the most recent earnings season the growth prospects for coming quarters did roll back a little.

However, rolling back to slower growth is a lot different than negative growth which speaks to recession. So investors will likely need to see much more pain in this area before hitting the sell button enough to truly break out of this range, tumble through 4,000 (point of psychological support) and be on the move back to the June lows.

One last idea to share with you today which came from a headline on CNBC this past Wednesday:

Home prices fell for the first time in 3 years last month, biggest drop since 2011

This is an interesting trend to see develop because home prices have been soaring ever since Covid came on the scene. Interestingly there are some important lessons from economics that were always going to happen with housing...it was just a matter of time.

First, rising mortgage rates makes housing more expensive...which tends to be deflationary to housing prices over time. Thus, the rise in housing prices should stop as it becomes more expensive to borrow. We may be hitting that wall now.

Second, most consumers have more money tied up in their homes than in other investments. So they often judge their net worth and desire to spend based on the increased value stored up in their homes.

Obviously that has been positive for the last couple years leading to a strong consumer. But now with this new, negative house trend unfurls, coupled with crippling inflation in the price of everything else, it should start to weigh more heavily on the consumer psyche thus hurting future spending which increases the odds of recession.

Let’s boil it down...

I am bearish.

The market is undecided...but once again leaning more bearish after the Fed wake up call on Friday that fighting inflation should come with more economic pain. However, until there is more proof of that pain showing up in employment and corporate earnings then it may be hard for stocks to head lower than 4,000.

This coming week offers more clues on the health of the economy. Not just Government Employment on Friday 9/2, but also ISM Manufacturing on Thursday 9/1 and then ISM Services on Tuesday 9/6. Investors will be watching these closely...and so should you.

If you are currently strongly bullish in your accounts, then do consider getting more defensive at this time given the increase possibility of downside ahead.

And if you are gung ho bearish loaded to the teeth with short positions...then consider that being more cautious because if these upcoming reports are positive we could be sprinting higher inside this trading range...like back up to the 200 day moving average at 4,307.

What To Do Next?

Discover my hedged portfolio of exactly 10 positions to help generate gains as the market descends back into a bear market territory.

And yes, it did end up firmly in the plus column this Friday as the S&P tumbled -3.37%.

This is not my first time employing this strategy. In fact, I did the same thing at the onset of the Coronavirus in March 2020 to generate a +5.13% return the same week the market tumbled nearly -15%.

If you are fully convinced this is a bull market...then please feel free to ignore.

However, if the bearish argument shared above does make you curious as to what happens next...then do consider getting my “Bear Market Game Plan” that includes specifics on the 10 positions in my hedged portfolio.

Click Here to Learn More >

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return

SPY shares fell $1.16 (-0.29%) in after-hours trading Friday. Year-to-date, SPY has declined -14.03%, versus a % rise in the benchmark S&P 500 index during the same period.

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, 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 picks.

More...