6/1 debt deal deadline appears to be of major importance for the stock market (SPY). But that’s nothing more than a sideshow and a distraction from what’s really important. 40-year investment veteran Steve Reitmeister explains what investors need to focus on to stay ahead of the market in the coming weeks. Check out the recent comment below for his market outlook, trading plan and top tips.
The debt ceiling is a sideshow. No real theatre. And no real reason for stock moves.
The sad fact is that we are still stuck at a standstill and don’t know if the traffic will flow bullish or bearish from here. In the meantime, investors are ready to trade any ripple in the water, no matter how inconsequential.
What really matters is the next big wave. Will this be bullish or bearish?
Solving this conundrum remains the key to future investment success… and will therefore continue to be our focus today.
market commentary
Last week, stocks were said to have hit the bullish breakout point of 4,200 for the S&P 500 (SPY) on the news that an agreement on the debt ceiling is on the way.
Shares then tumbled a little over 1% on Tuesday as debt talks dragged on in typical DC fashion.
Let me tell you how this will play out from here so there’s no mystery.
Until the key date 1.6. there will be a lot of political theater. This could include a temporary finance deal so that a longer-term contract can be secured after the deadline.
But somehow a deal comes about, just like every time in the past… and every time in the future. Shares will rise on this news. Maybe even briefly above the 4,200 mark.
But when the smoke clears, investors are still faced with the same conundrum. The question is, will a hawkish Fed, desperate to contain inflation, trigger a recession and a deeper bear market…or can this catastrophe be averted to pave the way for another uptrend?
As you know my previous commentsI think the downtrend is the most likely as the Fed usually talks about raising rates as a soft landing, but fails 75% of the time because a recession actually occurs.
This time, they’re telling you head-on that you’re in for a mild recession eventually. So, assuming the Fed’s same margin of error, a deeper recession is likely. This leads to lower earnings prospects and significantly lower share prices. (Yes, below the October 2022 low of 3,491).
This debate has been at the heart of the trading range scenario that we have been pondering all year, in which the bulls make as good a case as the bears. Their main argument is that there is always no recession.
When bulls or bears come up with more compelling arguments, the market will move in that direction. That means we’re best looking for the clues that tip the scales one way or the other.
In that regard, there were some interesting points to consider from key Fed officials this week. Consider that investors are now forecasting an 80% chance of freezing rates at this level. Some will see this as a moderate turnaround and a reason for a rebound.
Fed’s Neel Kashkari Says…not so fast! Here are the key segments from the CNBC review:
“So do we start raising again in July? Possibly, and the most important thing for me is that we don’t take it off the table.”
“Markets seem very optimistic that rates will fall now. I think they believe that inflation will come down and then we will be able to respond to that. I hope they’re right,” he added. “But nobody should be confused by our commitment to bringing inflation back to 2%.”
“This is the most uncertain period we have ever experienced when it comes to understanding the underlying inflation dynamics. So I have to be guided by inflation and I think we are guided by inflation. We may have to go north.” of 6% on the federal funds rate, he said. “If banking tensions start bringing inflation down for us, then maybe we’re… closer to the end.” I just don’t know right now.”
On Monday, St. Louis Fed President Bullard said he expects two more rate hikes to bring inflation back to 2%. In fairness, he also thinks the likelihood of a recession is overstated and not a necessary outcome of the process. (Recall the Fed’s 75% recession result on rate hike.)
Finally, Fed Governor Bostic said a week ago that he doesn’t expect any rate cuts well into 2024.
All of these statements contradict current estimates that investors are expecting in September. I don’t know how many times investors can get this process wrong as Fed members have always made it clear that they intend to keep rates higher for longer and have explicitly stated that there will be no rate cuts until 2024.
So here is the Economic Catalyst watch I participated in my previous comment:
5/25 applications for unemployment benefits– This will not be strong enough on its own as investors would expect input into Government Employment Report 6/2. However, as the number of jobless claims approaches 300,000 a week, it historically suggests that the unemployment rate is about to rise for quite a while.
5/31 ADP Employment, JOLTs– 2 other job reports, often used as leading indicators of the government’s monthly employment situation.
6/1 ISM Manufacturing, Unemployment Claims- There have been MANY weak readings for the ISM manufacturing index without any real indication that a recession is imminent. However, this is still one of the most important monthly reports for monitoring the state of the economy.
6/2 Employment situation in the state – The number of new jobs this month is expected to fall further to 180,000. Note that population growth requires 150,000 new jobs per month to keep the unemployment rate at this level. Therefore, any move below this level could result in investors forecasting even worse readings. Many eyes will also be on the wage inflation component as this persistent inflation is clearly a nuisance to the Fed.
6/5 ISM Services– In positive territory last month at 53.4. But if this reading falls below 50 and slips into contraction territory, it would definitely increase the likelihood of an imminent recession.
June 14 Fed Meeting- More and more investors assume that they will take a break with the rate hike. But that’s very different from the move to lower interest rates, which they still claim is a 2024 event. As such, the Powell press conference following the rate hike decision will be closely watched for clues as to what’s next.
Finally, I want to make sure that investors are not sucked into a post-debt rally. Clear the smoke of that event to get back to the real debate of whether a recession looms in the coming months. This will determine whether stocks go up or down.
The above clues will help you put the pieces together. However, if you’re having trouble understanding the whole thing, keep checking out my comments to keep me updated.
What do you do next?
Discover my balanced portfolio approach for uncertain times. The same approach that has clearly outperformed the S&P 500 in recent months.
This strategy was developed using over 40 years of investment experience to recognize the uniqueness of the current market environment.
It is neither bullish nor bearish at the moment. Rather, it is confusing and uncertain.
However, given the facts at hand, we will most likely see the bear market awaken from hibernation and send stocks plummeting again.
We’d love to strategize to not only weather this downturn, but actually thrive. That’s because, with 40 years of investing experience, this isn’t my first time participating in the bear market rodeo.
If you’re curious and want to learn more and see the handpicked trades in my portfolio, please click on the link below to be taken to the real page of what’s happening:
Steve Reitmeister’s trading plan and top tips >
We wish you every success in investing!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Riding Master Total Return
SPY shares were up $0.26 (+0.06%) in after-hours trade on Tuesday. Year-to-date, SPY is up 8.69%, while the benchmark S&P 500 index is up % over the same period.
About the Author: Steve Reitmeister
Steve is better known to StockNews audiences as “Reity.” In addition to being the company’s CEO, he also shares his 40 years of investment experience Reitmeister Total Return Portfolio. Find out more about Reity’s background and links to his latest articles and stock picks.
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