Bears Calling
S&P 500 cratered as Powell indeed delivered credibly, and the markets were surprised even though his speech merely confirmed the known positions – albeit using strong and direct language such as bringing some pain to households and businesses, or mentioning the necessity of acting with resolve regardess of the employment costs of bringing down inflation, the goal which Powell even mentioned as being unconditional. This should put to rest all the fantasies about pivot and soft landing – the U.S. economy remains on course to enter recession late 2022 / early 2023 while sticky inflation and restrictive Fed are here to stay. Yes, I stand by the 5-6% year end CPI call of long ago.
How about the Fed funds rate? It‘s about to rise to 4% and possibly beyond – it doesn‘t matter that Treasuries had been doing the tightening for the Fed. The inflation rate and danger of inflation expectations becoming entrenched, requires hiking the Fed funds rate well, well beyond its natural rate, and keeping it there. So much had been broadly acknowledged by many Fed speakers – and Mester even sees no rate cuts next year. That‘s quite a resolve – and it paints a clear road for the markets ahead. As a new downleg in the S&P 500 bear market has been rubberstamped by Powell, Treasury yields will reflect the worsening economic outlook (LEIs are essentially falling for 5 months in a row) in declining yields before these move higher again. Yes, it‘s a paradigm shift – secular bear market in bonds is upon us in this decade, accomplanied by persistent inflation in necessities of life, and a commodities superbull run.
I hope you capitalized on the rich coverage throughout Friday – both in the analysis and on my very lively Twitter feed, which comes on top of getting the key analytics right into your mailbox.
One more thought on valuations, the P/E ratio and price targets – as through the quarters ahead the earnings would go down, and the slowing economy would be reflected in declining (yet persistently sticky) inflation levels, look for P/E to come down through both the E and through how much the buyers would be willing to pay for future cash flows. Inflation falling would not prop up the valuations nearly sufficiently enough, and my 3,950 target, is just that – a surefire one to be reached, with solid potential for further gains on the short side beyond those already in. Macroeconomics, momentum, intermarket analysis – I‘m keeping a close eye as always, for this won‘t be a one-way slide…
Let‘s move right into the charts (all courtesy of www.stockcharts.com) – today‘s full scale article features good 6 ones.
S&P 500 and Nasdaq Outlook
S&P 500 is poised to continue the fresh downleg, but reaching the lows won‘t be a one-way journey. Friday was a starting point in the recognition of more pain to come for buy the dippers – market breadth has decidedly turned, and VIX confirms.
Credit Markets
HYG is clearly pointing to waning risk sentiment, and it would get worse. Corporate bonds are on the defensive while decline in Treasury yields would add to the stock market woes, not saving Nasdaq.
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Bitcoin and Ethereum
Crypto appears to want to rally, but I‘m not buying into it – rips are still to be sold.
Related: The Bear Market Is Over. Or, Is It Just Hibernating?