The S&P 500 (SPY) appears to be trading in a fairly tight trading range. Yet there are more facts emerging that would lead one to conclude a recession. It includes the discussion of sticky inflation. You may not have thought much of it…but I assure you it is public enemy #1 for the Fed. Read below to understand how sticky inflation increases the chances of a bear market downside in the weeks ahead.
Earlier this week I shared an important announcement that I was becoming more bearish. There are reasons for that Clearly spelled out here.
One of the main issues is that inflation is still very high and that is why the Fed is still slamming the brakes on the economy with their hawkish approach. It may be hard for some to see who points to the big drop in gas prices as evidence of taming the inflationary beast.
Unfortunately, we still have “StickyThe situation is at hand due to sticky inflation. Let’s dive into this little-discussed topic of why the odds point to further bearishness in the weeks ahead.
Market Commentary
The traditional view of inflation is to look at the movement of the Consumer Price Index (CPI). See the clear and steady decline of that key metric over the past year below:
It’s a serious and sustained improvement that leads some to feel that we don’t need to do much more to reach the Fed’s stated 2% inflation target. This is why many investors are betting on the Fed pivoting to lock the brakes and start cutting rates.
That’s not going to happen anytime soon!
First, because the Fed reiterates that rates will not be cut this year. With every announcement from the Fed, investors are increasingly worried that they are oddly skeptical that they will change their tune by September. I almost think Powell wants to say something like “read my lips“or”Am I shaken?”.
Second, and more importantly, because the Fed bases their decisions on sound logic. It is that there is more to the inflation equation than just the CPI. And not all inflationary elements are equal.
Enter the conversation about “sticky inflation”.
This Atlanta Fed This leads to an attempt to divide the CPI report into 2 sub-indices:
- Flexible CPI (where prices change quickly)
- Sticky CPI (where prices change slowly)
As you can see in their most recently updated chart below, headline inflation may be down, but sticky inflation remains stubbornly high at +6.5% year over year (yes, even higher than the +4.9% CPI reading).
Below is a good summary of what each sub-index contains. But for simplicity most of the problem with sticky inflation comes from housing/shelter (OER below), medical services, entertainment and restaurant prices.
Plain and simple, the Fed is on a mission to suppress inflation. And even though some investors think they see CPI or gas prices improving…they are not economists and do not appreciate the fullness of the inflation story.
Now let’s remember that Fed officials are actually economists and academics who fully understand these complex concepts. They fully see and understand the problem with sticky inflation and are firmly planning to eliminate it which will keep rates high for years to come…Or even longer.
And yes, the Fed is fully aware that this will create a potential recession. In fact, it is still their base case as of late. (This concept is the basis of my argument for becoming more bearish as shared My last comment).
This brings us back to the importance of being vigilant on our bearish watch as more signs of that becoming a reality will awaken the bears from hibernation leading to new stock lows. The key to the recessionary clock is employment, which has been remarkably resilient.
The leading indicator of the monthly government employment situation report is the weekly jobless claims report every Thursday. As you can see in the chart below this is slowly progressing over time. The key for most people is if it reaches 300,000+ per week that is usually a sign that the unemployment rate is about to rise.
The jump in the chart above is a 10% week-over-week increase in claims to 264,000. So this indicator is not yet in trouble territory, but directionally we are approaching the point where unemployment may rise, which will certainly sound more recession alarms… and stocks will move lower.
How does this affect our trading plan?
Let me pick up some key statements from my 5/9/23 Reitmeister total compensation Commentary which applies here also.
“My recommendation is to stay balanced (bullish/bearish) like we do in Reitmeister Total Return until the bearishness rears its ugly head. Because there have been many false recession alarms in the last 15 months which have not materialized which has led to a rise in stock prices.
Your best bear trading signal is when the market finally breaks below the 200 day moving average (currently at 3,975). From there a bearish FOMO rally should begin with 10-20% more downside to the final bottom.
Why isn’t more recession changing now?
Because if a bearish outcome is only 65% certain…that means I still see a 35% chance of a bearish and deep bear not happening. So, we want more cards to be put on the table before we bet on further downside.”
What to do next?
Discover my balanced portfolio approach indefinitely. The same approach that drove the S&P 500 (the spy) by a wide margin in recent months.
The strategy was built on over 40 years of investment experience to appreciate the unique nature of the current market environment.
Right now, it is neither a boom nor a recession. Instead he is confused…unsettled…uncertain.
However, given the facts at hand, we are likely going to see a bear market come out of hibernation mauling stocks down once again.
Thankfully we can strategize to not only survive that recession…but thrive. That’s because with 40 years of investing experience this isn’t my first time for a bear market rodeo.
If you are interested in learning more, please click the link below to jump right into the action:
Steve Reitmeister’s Trading Plan and Top Picks >
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Rayty (pronounced “righty”)
CEO, StockNews.com and Editor, Reitmeister total compensation
SPY shares traded down $0.59 (-0.14%) in after-hours trading on Friday. Year-to-date, the SPY is up 8.04%, the % gain of the benchmark S&P 500 index over the same period.
About the Author: Steve Reitmeister
Steve is better known to StockNews audiences as “Raity”. He is not only the CEO of the firm, but also shares his 40 years of investment experience in the company Reitmeister Total Return Portfolio. Learn more about Ritty’s background, with links to her most recent articles and stock pics.
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