This is a brutal bear market. In the first quarter we saw commodities go up while the stock market fell, but in May the price of silver broke down to warn that the stock market decline may turn into a generalized sell-off in which it comes difficult to make money in anything for a period of time. That seems to be the case as yesterday the commodity complex and related stocks took a hit.
We are in a slow motion bear market drifting down as the US economy goes through a period of recession. It’s likely to be a shallow recession, but it could easily last into the first quarter of next year. People are in denial. Tuesday morning I saw an article in the NY Times saying that it is a “technical recession,” because the first half of GDP growth this year is clocking in with negative prints, but to ignore that and just focus on the fact that it is still hard for many businesses to find workers. Look for this line of thought to appear in the financial media to reassure stock market players and even enter the crypto world with the gurus there continuing to tell people to “HODL” on.
One narrative that has kept hope at times for stock market bulls, and been used to justify the last two rallies, is that the Federal Reserve would stop raising rates if the stock market continued to go down like they did in 2016 and 2018. In the bubble world of stock market trading, where people are glued to Robinhood apps and the daily gyration, it seems like a rational thing to believe in, but it isn’t, because inflation is much more damaging to the real economy than simple stock market drops are. The old playbook before the internals of the market peaked last summer for stock trading no longer applies and you must now wait to buy after stock market declines and not chase rallies to have a good entry point. That is the only way to really buy anything in a bear market.
Before the open yesterday, the Wall Street Journal had a big article, sourced with various Federal Reserve officials, with the subtitle: “Fed is willing to risk recession now to avoid much worse recession later.”
You really need to read the whole thing, because every serious investor in this market should if they want to understand what is happening, but here are a few key quotes:
“Recessions are painful because millions of people lose their jobs. But central bankers, scarred by the experience of the 1970s, think high inflation is worse because it distorts economic behavior and is likely to lead to a more severe downturn later. High inflation became entrenched in the 1970s after high inflation expectations took hold. In the early 1980s, the Fed delivered shock therapy with punishing rate increases that brought down inflation but triggered recessions that featured the highest unemployment rates since the Great Depression.”
“Fed officials are nervous for several reasons. First, economic literature suggests that when inflation is low, people don’t pay much attention to price changes. Once prices rise enough, however, they take notice, influencing their long-term expectations.”
““My view is you can pay me now or you can pay me later. If you procrastinate and don’t respond with some aggressiveness, then you’re just going to have to do more later,” said former New York Fed President William Dudley. “I think Jay understands that that’s not a great place to end up.”
The Federal Reserve is simply forced now to fight inflation until the CPI rate goes down.
It won’t stop raising rates until that happens even if the stock market continues to fall.
In fact, the Fed may not even mind that if commodities and oil prices pull back with the market as they have been doing for the past few months.
This is a real bear market and stock market bulls need to recognize that.
The Federal Reserve is no longer here to help them like they have done in the past.
There is no reason to doubt what the bond market is pricing in, which is continued rate hikes through the end of the year, with the Fed fund rate going to the 3.00 – 3.50 range and peaking out there. It currently is sitting at 1.75, with a .75 hike expected at the end of this month.
I can see that happening and the CPI rate going down to the 4-5% range and the Fed declaring a time to pause the hikes at some point in the first quarter of next year.
There is no reason to make any big buys in the general stock market until there is a sign of a true panic bottom in the stock market or we reach the end of this Fed hiking cycle.
-Mike
