Weekly Update

Still Stormy Out There

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Published June 10, 2022

Investors are facing a tremendous amount of uncertainty these days as inflation continues to push out the timeline for when the Federal Reserve might pause interest rate hikes. Friday’s “hot” inflation data offered the Fed no new cover for backing off their inflation-fighting posture. Stocks reacted negatively and the rather tepid effort at a market rally was reminded that the bears remain in charge. After spending days trading in a range, the bottom of the range gave way Thursday afternoon presumably as rumors of the hot inflation reading began circulating. The report’s release Friday morning confirmed the rumors and the selling accelerated. Note that two prior end-of-day spikes in buying (circled) were met by gaps downward the following morning, leaving these bursts higher very lonely and without any follow-on buying.

bursts without any follow-on buying


The heightened inflation and perhaps other emotional factors sent the consumer sentiment reading to its LOWEST POINT EVER(!!!!), in the realm of previous recession-era readings. That’s an astounding metric as unemployment remains at near all-time lows and consumer asset values (read: widespread +20% jumps in housing prices) and savings accounts, overall, remain flush. Interest rates, while rising, are merely returning to more normal levels. Yes, the Fed is late, once again, in addressing the speculative excesses that their monetary policies (zero interest rates) fueled.

So, let’s say that consumer sentiment is correct, and a full-blown recession really is at hand, a scenario that clearly is weighing down stock prices. Here is how the stock market has reacted in past recessions. All recessions are different as the solid brownish lines below show. Typically, the stock market begins to bottom and move higher before the economy hits its low point, sometimes by as much as a year or more.

Stock market reaction in past recessions

So much damage has already been done to this market. The broad market indexes, driven by a handful of tech/consumer heavyweights, masked the underlying destruction for much of last year. That handful has been getting hit and leading the way down this year.

Where does it end? Market prognosticators have complained that this bearish period has not yet had its whoosh(!) downward where the bottom appears to be completely falling out only for investors to swoop in to buy the bargain-basement stocks. It’s possible that could have happened in late May and we are in the midst of testing that bottom as we write (S&P 500 level of 3800-3900 being that level). Or, of course, that final whoosh(!) might still be to come.

There are certainly signs that inflation is peaking despite the headline reports showing otherwise. The headline reports remain above +8% inflation (albeit flattish in their movements now). But there is ample evidence that the largest inflationary force – wage growth – is about to change course. Tech employment has now shrunk for three straight months. Job growth has slowed substantially as this chart of payrolls shows a marked slowdown in growth from the post-pandemic ramp.

Job growth has slowed substantially

There are now reports everyday of tech companies cutting their workforce as exuberant demand forecasts come back down to more ‘normal’ levels. Additionally, China appears to be reopening with the logjam in supply that created beginning to ease. Those two forces – labor market change and supply chain change – will take a good while to normalize. But the stock market will begin to sniff that out and the market bottom will be in. In the meantime, we continue to slog through a violent stock market period.

Market Update

So much for the rally attempt. Stocks this week slid hard back into the bear market with most of the damage done in a perilous Friday session. Prior to that investors largely churned along this week. We saw a +0.3% lift Monday with Amazon (AMZN) stock splitting to a more investor-friendly $120/share from the near $2500/share before the split. Stocks rose +1% Tuesday despite a warning from Target (TGT) that inventories are too high and the retailer will need to offer discounts to get them back in line. Treasury head Yellen told Congress that inflation is likely to remain elevated for awhile. Investors did an about-face Wednesday, giving back all of the Tuesday gain. The European Central Bank (ECB) told investors Thursday that they will begin hiking interest rates to join the inflation-fighting parade by other central banks. Stocks fell sharply in the afternoon session, breaking recent support to close with a -2.4% loss. Friday’s inflation report disappointed investors by delivering a higher number rather than confirming the “inflation has peaked” scenario. A flat or down inflation numbers would mean the Fed’s path of interest rate hikes was locked in and investors could proceed with a bit more certainty. Instead, the Friday inflation report caused a jump in short-term rates with investors now believing the Fed could go as high as a +0.75% rate increase in their next meeting. In short, investors believe the Fed is fully intent in breaking the upward path of inflation and no longer concerned about supporting stock markets. So, every input suggesting upward pressure on prices brings about another slap to the stock market. As we get one or two of these Fed meetings and attendant interest rate hikes behind us, hopefully things will settle down. As for Friday, the 5-year yield charged higher Friday to 3.25%, above the 10-year note yield of 3.15%, thus inverting a portion of the yield curve and providing more fodder for those who believe recession is imminent.

The stock market’s brief rally effort, which ground to a halt the prior week at well-known resistance levels, tumbled back toward the market’s recent lows this week. The S&P 500 (SPY) fell -5.05% with the Nasdaq 100 (QQQ) dropping -5.67%. Smallcap stocks (IWM) slid -4.28%.

Warm wishes and until next week.