The S&P 500 (SPY) has been up, down and around this past week, thanks to the Fed statement and the government employment report on Friday. Nothing has changed in the market outlook on some levels. However, a couple of important things happened this week that increase the chances of a downturn and add to the downside of a bear market. Get the full story in the article below.
Lots of economic fireworks this past week.
Lots of stock price movements every day.
But unfortunately, not much has really changed for the near-term market outlook. That means limbo and the trading range base case remains until a new catalyst arises to put the bull/bear argument to rest once and for all.
However, in the long run I think the chances of a recessionary outcome are increased. So be sure to read below for the full story including our trading plan in this unique environment.
Market Commentary
Before we get into the thick of things today, I wanted to get something on your radar. And it’s about the rise of artificial intelligence (AI) for investing.
Every day we get more and more emails from customers asking how they can use tools like AI and Chat GPT to improve their investments.
Indeed, this is a topic I have thought about a lot since StockNews is part of the Tiffin Group; A fintech company specializing in using artificial intelligence for the benefit of investors. Especially through AI powered investment website Magnifi.com.
In fact, I recently wrote a lengthy review of Magnify’s many features and benefits. If this topic of AI based investing interests you, please click below to find the full story:
How AI Improves Your Investment Process
Now back to today’s market commentary…
Let’s start by rolling out what we learned this week and then how it affects the market outlook and our corresponding trading plan.
On Monday 5/1 we started the month off with ISM Manufacturing coming in at 47.1. Sadly it’s below 50 which indicates things are shrinking. The forward-looking new orders component was worse at 45.7. The S&P 500 (the spy) was flat on the news.
Then came 3 on Tuesday 5/2rd Direct monthly declines in JOLTs report (job openings and labor turnover). In fact, there are 20% fewer jobs now than there were a year ago.
This fits with the idea that a surprisingly resilient job market is finally showing signs of cracking. That’s because before you consider laying off employees, you first stop hiring more employees. That’s what the JOLT report is starting to convey.
Shares fell -1.16% on the day…partly on this news…partly on some profit taking off the table before the Fed announcement.
Indeed, the Fed’s announcement on Wednesday was the main event of the week. Everything went exactly according to plan in my book. That quarter point rate hike comes with language that there is more work to be done to bring inflation back to their 2% target level.
Bulls will point to a clear change in language that this could be the last rate hike. However, bears can point to statements that they expect to maintain this high level at least through the end of 2023 even if there are no further rate hikes.
Also, the weakness of the banks is having a negative effect on the economy…so they don’t need to raise rates further. This event is like a rate hike or two on its own.
Most importantly, their base case still calls for a mild recession before their inflation battle is over. That includes a 1% increase in the unemployment rate from 3.5% to 4.5%.
Here is that math problem. Only once in history has unemployment risen this far and no more. This means that usually when the Pandora’s box of recession is opened, the unemployment rate goes up. Thus, predicting only a mild recession may be somewhat fanciful. The sum of this negativity explains why stocks moved lower on Wednesday and Thursday.
Interestingly, the script flipped with the expected government employment report on Friday where 253K jobs were added (30% more than forecast). It’s hard to see a recession in the details that lead to a rise in stock prices.
However, as sweet as that employment rose smells, it also comes with some serious thorns. Which is higher than the expected wage inflation of +0.5% per month. This “sticky” inflation measure calculated at a 6% annual run rate is too hot for the Fed which only fuels their hawkish resolve…which only fuels the likelihood of a recession.
As things stand now, the market remains stagnant. Which means a trading range that is neither bullish nor bearish.
I would say the upper limit is 4,200 which has been critical resistance 2 times (early February and early May before the Fed meeting). And the lower end of the 200-day moving average is currently 3,970.
All moves within the range are meaningless noise and therefore do not change strategy. A break above would be a sign that a new bull market is upon us and seek risk more aggressively. While the following break will have us consider further risk-off measures.
However, I think the potential for a bearish case this week has increased due to some key concepts Powell discussed on Wednesday. Where they still predict a recession as part of the process of reining in inflation.
Here again, they forecast a mild recession with unemployment only rising to 4.5%. Yet history proves that is highly unlikely and would be worse. Please note that the Fed cannot say out loud:
“Hey, we’re going to crash the economy and a lot of you are going to lose your jobs. You’re welcome.”
The limbo and above trading range will continue until more investors see this bearish build. Just let people out there appreciate that the odds of a recession and cold bear market are higher given the fresh information now at hand.
What to do next?
Discover my balanced portfolio approach indefinitely. The same approach that has beaten the S&P 500 by wide margins 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.
Yet, even in this unattractive setting we can chart a course of outperformance. Just click the link below to get 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 were trading up $7.50 (+1.85%) at $412.63 per share Friday afternoon. Year-to-date, SPY is up 8.31%, the % gain of the benchmark S&P 500 index over the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reighty”. 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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