bear market

We’re Just Entering the Middle of This Bear Market

By Market News, , Money Morning • Tuesday, December 6, 2022

I want you to look at a chart - the SPDR S&P 500 Trust ETF (NYSEArca: SPY), which tracks the S&P 500 index. It's how mere mortals like us can play the stock market for essentially pennies on the dollar.

Here's what you're looking at...

In November, markets experienced dramatic swings up and down based on statements coming out of the Federal Reserve. Following the November 2, 2022 Fed meeting, Fed Chair Jerome Powell reminded investors that the central bank would continue raising rates to reach its 2% inflation target.

Powell's statement fueled the worst one-day performance ever on the occasion of a Fed Open Market Committee meeting. That specific selloff is marked by the red arrow on the chart's left side.

Then, on November 30, Powell spoke at the Brookings Institution. Again, he said the Fed would aggressively raise rates to reach 2% inflation, albeit at a slower pace of hikes. Speculation of a 50-basis point hike fueled a short-covering S&P 500 rally over the last two hours of the trading day. That's the green arrow on the right.

Then the S&P 500 rallied to 4,100 on Thursday, hitting that key support number.

Here's the thing, though: Nothing had changed in Powell's language. Like at all.

But markets delivered two much different outcomes.

The Fed Is Nowhere Near Done with Rate Hikes

Last week, the market told us exactly why we should stay short as the jobs report and personal-consumption-expenditures (PCE) index both showed growth. This morning we saw a continuation of this trend as the Services ISM surprised analysts to the upside, delivering a 56.5 reading versus an expected 53.5.

The ISM is a gauge of U.S. business conditions at companies such as restaurants and banks, and a rising value signals the economy is still expanding. Any number over 50% shows the economy is expanding, but a reading over 55%, like we got this morning, is above historical averages.

Here's what could happen next...

Stocks

Why the Market Told Us to Stay Short This Week

The market is still pricing in a magical soft landing or mild recession with inflation falling back to target. The odds of that occurring seem low, and yet markets are pricing in a fairly high chance of precisely that outcome.

Jerome Powell has not signaled he'll let up; he still points to how much needs to be done in order to bring down inflation. He even pointed to what is called a wage-price spiral, in which paychecks and prices move in lockstep, creating a very serious problem. Target rates which are still at 5% are above and we won't see that number until 2023.

Something far bigger is also set to drag the market down...