How funny it was to see traders get it wrong once again. They misread the Fed announcement at 2pm ET leading to a big 1% rally for the S&P 500 (SPY). Within minutes of Chairman Powell speaking it dawned on every body that things have not gotten better…only worse. And thus the odds of future recession and greater stock downside have greatly increased. This article spells out why. Even better it highlights a game plan and top picks to profit as the market heads lower from here.
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After the famed Chairman Powell speech from Jackson Hole in August investors got the memo that the recent rally was unfounded and time to start selling stocks once again. This prompted me to write this article, Investors: Wake Up and Smell the Pain.
Wednesday’s Fed announcement and press conference feels very much the same. That being investors getting ahead of themselves with a 9% rally in October before Chairman Powell lowered the hammer once again.
They say “fool me once, shame on you…fool me twice, shame on me”.
If true, then let’s highlight the key elements from the recent Fed announcement so you understand why we are likely headed towards a recession. And why stock prices will head much lower before this bear market ends.
Market Commentary
There are so many threads to pull on from the Fed statements on Wednesday. However, at the end of the day the key point came out 45 minutes into Chairman Powell’s press conference when he had to admit that the window to create a soft landing had narrowed.
Meaning it is possible to create a soft landing for the economy. But HIGHLY UNLIKELY.
Let’s remember that Fed has a slightly optimistic bias as they don’t want to unnecessarily scare people. And indeed, a soft landing is their preferred outcome. That being to bring down inflation with as little damage to the economy as possible before resuming growth and prosperity.
You could tell that Powell was trying to be as honest as possible with his answer for which he had to begrudgingly admit that the window for creating a soft landing had narrowed. That is because they have raised rates this much with little real effect on taming inflation. Thus, how much harder they will have to push on rates to bring down demand that will most likely lead to recession.
The S&P 500 (SPY) was up about +1% when his speech began. Within minutes investors could finally see that there may have been an improvement in clarity in their statements…but not a real change in policy. From there stocks started heading lower. But once Powell declared the window for soft landing had narrowed…it became a downright bloodbath for stocks ending in a -2.5% session.
The above is my morning after thoughts that would not allow me to get back to sleep before I got typed it out. Meaning above is what is most important for investors to understand. Yet indeed there is more to share.
Let’s roll back to the 2pm ET when the announcement came out.
I was watching CNBC intently and could not take my eyes off the movement of stocks with every new comment made on screen. It was truly amazing how every positive comment was followed by an uptick just seconds later. And every negative comment with a decrease in stock prices.
Most of the commentators were saying how amazing it was that this pivot was taking place to discuss the idea of slowing the pace of rate hikes and then pausing to see how the “lagged effects”. I was screaming at the TV “you guys don’t get it!!!” My wife joked that I was having a mental break.
Gladly CNBC economic commentator Steve Liesman echoed my view that indeed there is an improvement in the clarity of policy steps…but not a real change in the long term Hawkishness of the Fed. This became all the more apparent within minutes of Powell’s prepared speech that echoed many of the points from Jackson Hole just a couple months back. That being…
- This is a LONG TERM battle to create price stability (closer to 2% target inflation)
- Will not ease off too soon as it may reignite inflation before the job is done. “It is premature to discuss pausing”.
- The economy will slow and labor markets will weaken. That is because the Fed intends to weaken demand to get in line with supply. This is how they expect to achieve lower inflation.
All in all, it seems the Fed is still on a path to a restrictive 5% rates with smaller rate hikes in the future. Followed by a pause to see the “lagged effects” of policy. Some are giving this idea of a pause far too much significance.
Just remember there is a 1-2 quarter delayed effect of Fed policy on the economy. So this is just the Fed being logical about reviewing conditions before making their next move as they fear going too far which would be even more detrimental to the economy.
As stated at the top, the most beneficial Fed statement came a full 45 minutes in when many folks may have checked out. He was asked if the window to create a soft landing has narrowed. He unfortunately had to admit that was the case and odds of soft landing are greatly diminished.
Also consider that as of now the Fed sees no real improvement in inflation. Especially true in the labor markets generating wage inflation. And thus, will keep raising rates. And thus, the full measure of those policies is not yet seen in the economy.
In my book there is NO WAY to bet on start of next long term bull market til investors appreciate how bad the economy will get. That is a first half of 2023 event and thus far too early to get bullish.
Once again, given that the Fed was late to the party to raise rates means they are highly unlikely to create a soft landing. They even admitted as much which was truly the nail in coffin for stocks on Wednesday.
So a hard landing means recession with commensurate reduction in stock prices. Thus the bearish thesis is unchanged. Just a matter of when the rest of the market wakes up to the message with correlated lowering of stock prices.
Not just a retest of recent lows. I mean the full measure of pain associated with a bear market.
Remember 34% decline is the average drop for a bear market. That equates to 3,180. However, the valuations for stocks started near record highs…yes even worse than the tech bubble of 1999. Thus, may have to fall a bit further than 3,180 to find bottom.
In the end the investment story is as simple as “Don’t Fight the Fed”.
They are telling you with a straight face that the odds of recession are very high.
BELIEVE THEM!
And trade accordingly with full expectation of lower lows on the way for stocks prices.
What To Do Next?
Discover my special portfolio with 9 simple trades to help you generate gains as the market descends further into bear market territory.
This plan has been working wonders since it went into place mid August generating a robust gain for investors as the S&P 500 (SPY) tanked.
And now is great time to load back up as we make even lower lows in the weeks and months ahead.
If you have been successful navigating the investment waters in 2022, then please feel free to ignore.
However, if the bearish argument shared above does make you curious as to what happens next…then do consider getting my updated “Bear Market Game Plan” that includes specifics on the 9 unique positions in my timely and profitable portfolio.
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares were trading at $370.94 per share on Thursday afternoon, down $3.93 (-1.05%). Year-to-date, SPY has declined -21.00%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
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