The S&P 500 (SPY) appears to be trading in a fairly tight range. But other facts emerge that would lead to a pessimistic conclusion. This also includes the discussion of sticky inflation. You may not have given this much thought… but I can assure you that this is the Fed’s #1 Public Enemy. Read below to understand how sticky inflation increases the likelihood of a bear market downtrend in the coming weeks.
Earlier this week I made an important announcement that I was becoming more bearish. The reasons for this are clearly stated here.
One of the key points is that inflation is still too high, which is why the Fed is still putting the brakes on the economy with its dovish policy. This may be hard to see for some, who point to a sharp drop in gasoline prices as evidence that the inflation beast has been tamed.
Unfortunately we still have asticky“The current situation is due to persistent inflation. Let’s dive into this underdiscussed topic to understand why the odds are rather bearish in the coming weeks.
The traditional way of looking at inflation is to look at the Consumer Price Index (CPI). Below is the sharp and steady decline in this key metric over the past year:
That’s a serious and steady improvement that leaves some feeling that we don’t need to do much more to reach the Fed’s declared 2% inflation target. This is why so many investors continue to bet on a Fed about-face to release the brakes and lower interest rates.
THIS WILL NOT HAPPEN SOON!
First, because the Fed keeps emphasizing that rates will not be cut this year. This happens with every single Fed announcement, much to the chagrin of investors, who oddly suspect they will change their tune by September. I almost feel like Powell wants to say things like “read my lips” or “Did I stutter?”
Second, and more importantly, the Fed’s decisions are based on sound logic. However, there is more to the inflation equation than just the consumer price index. And that not all elements of inflation are created equal.
Join the discussion on sticky inflation
The Atlanta Fed is leading this effort to split the CPI report into two sub-indices:
- Flexible CPI (where prices change quickly)
- Sticky CPI (where prices change slowly)
As you can see in the recently updated chart below, headline inflation may be declining, but sticky inflation is stubbornly high at +6.5% yoy (yes, even more than the +4.9% CPI reading) .
Below is a good summary of the contents of each sub-index. But for the sake of simplicity, most of the problem with sticky inflation is in the areas of housing/housing (OER below), medical services, leisure activities, and restaurant prices.
Plain and simple, the Fed’s mission is to curb inflation. And no matter what some investors think they see in the improvement in CPI or gas prices… they are not economists and do not understand the full inflation story.
Now let’s recall that Fed officials are actually economists and academics who fully understand these complicated concepts. They see and understand the problem of stubborn inflation and firmly plan to eliminate it, which is why interest rates will remain high until the end of the year …or even longer.
And yes, the Fed is FULLY aware that this is likely to lead to a recession. In fact, this is still their base case through year-end. (This concept is the cornerstone of my argument for an even more pessimistic stance, as I shared it my current comment).
This brings us back to the importance of staying alert for the recession as further signs that it is becoming a reality will awaken the bears from hibernation and lead to new lows in stock markets. Key to recession watch has been employment, which has shown incredible resilience.
The leading indicator of the monthly government employment report is the weekly jobless claims report every Thursday. As you can see in the table below, this value has gradually increased over time. For most, the key is when the number hits 300,000+ a week, which is usually a sign that the unemployment rate is about to rise.
The jump in the chart above shows the weekly increase in claims by 10% to 264,000. So this indicator isn’t in a worrying zone just yet, but we’re getting close to the point where unemployment could rise, which would certainly trigger more recession alerts… and push stock prices lower.
How does this affect our trading plan?
Let me take some key points from my 5/9/23 Riding Master Total Return comment that also applies here.
“My recommendation is to stay balanced (bullish/bearish), as we do at Reitmeister Total Return, until the recession starts to rear its ugly head. That’s because there have been many false recessionary alerts over the past 15 months that have not materialized.” resulting in stock prices surging.
Your best signal of a bear trade is when the market finally breaks below the 200-day moving average (currently at 3,975). A bearish FOMO rally should set in from there, with 10-20% more downside to the eventual bottom.
Why not be even more pessimistic now?
Because if only 65% are sure there will be a downtrend, that means I still see a 35% chance there will NOT be a recession and a deeper downtrend. So we want more cards on the table before we take a deeper bearish bet.”
What do you do next?
Discover my balanced portfolio approach for uncertain times. The same approach that beat the S&P 500 (SPY) has increased significantly 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’s confused…volatile…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 are interested in finding out more, please click on the link below to be taken to the correct page of what is 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 fell $0.59 (-0.14%) in after-hours trade on Friday. Year-to-date, SPY is up 8.04%, 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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