Last week, we talked about how it felt like deja vu as the S&P 500 (SPY) embarked on its 3rd bear market rally of the year. Well, today it feels even more that way, as the market is rapidly giving back these hard-fought gains. The market is down 4% from yesterday’s brief spurt higher when it seemed like the FOMC was endorsing a slowdown in the pace of hikes. But, these hopes were dashed during the press conference when FOMC Chair Powell pushed back against this notion and stuck to his hawkish leanings. In fact, he said that the terminal rate could go much higher which was the catalyst behind the selloff. In today’s commentary, I want to break down the Fed meeting and then discuss why it’s a bearish development for the market and confirmation of our bear market thesis. Read on below to find out .
(Please enjoy this updated version of my weekly commentary originally published November 3rd, 2022 in the POWR Stocks Under $10 newsletter).
Over the last week, the S&P 500 (SPY) is down by 2%. And, it’s a brutal end to the bear market rally. In fact, it is better evident if we look at the Nasdaq 100, where 2 of the market’s generals have been slaughtered and laid to waste – GOOGL and META.
The index has already given back about 75% of its gains from the bear market rally. In contrast, the losses for the Russell 2000 and S&P 500 are much more muted.
This is a continuation of a theme that we discussed last week – the ‘market of stocks’ is holding up much better than the stock market.
And, it shouldn’t be too surprising given the rise in long-term rates which is more of a headwind for large and mega-cap stocks.
The rise in rates could relent if the market (or the Fed) saw some weakness in inflation data or the economy. That doesn’t seem to be the case although we will learn more about the state of the employment market tomorrow.
But so far, there is no indication of truly broad-based weakness for employment (based on unemployment claims) which means that rates are going to be ‘higher for longer’.
Why the FOMC Was so Bearish for the Markets
One of the reasons behind the ‘bear market rally’ was the belief that the Fed could be on the verge of ‘pivoting’ in terms of slowing its pace of hikes and eventually stopping sometime in early 2023.
Well, this is now in doubt as the stubbornness of inflation and specifically, core inflation makes it clear that hikes are going to continue for some meaningful period of time.
Now, we are back to the initial conditions which made January 2022 so bearish. Rates are rising, while growth is slowing. But growth isn’t slowing fast enough to cause the Fed to pivot.
Thus, rates will keep rising until the economy breaks or inflation breaks.
Rising rates are a potent headwind for the stock market. As we learned this year, the most bullish scenario is a choppy sideways market that gets some nice rallies out of oversold conditions.
While the most bearish scenario is that the S&P 500 (SPY) plunges lower when we get the combination of rising rates and negative news on the earnings or economic front.
Now that this bout of bullishness is over, I expect reality to set in over the next couple of weeks and the market to visit lower levels.
Portfolio Strategy
We are back to a neutral setting and prepared to take more action if the market breaks key levels on the downside which includes the October lows of around 3,600.
I would expect that cyclical stocks would lead on the downside, while defensive stocks and sectors would outperform.
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All the Best!
Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter
SPY shares were trading at $373.35 per share on Friday morning, up $2.34 (+0.63%). Year-to-date, SPY has declined -20.48%, versus a % rise in the benchmark S&P 500 index during the same period.
Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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