Market Update
Market Edge

Market Update Week of December 5th, 2022

Our current market opinion is for our subscribers to be in a cash (money market) position.

There is a season for everything

There is an observation that many people hold to – that within every adversity lies an opportunity. This is certainly true for investors. Just not yet.

Many if not most analysts foresee a recession coming in 2023. We’ve spoken at length about this in previous posts, however there are some economists that are of the opinion that one has already begun.

There is a widespread opinion among equity strategists that the S&P 500, which closed the week this past Friday (12/2) at 4,071 could fall to as low as 3,000 sometime next year. That would be a drop of about 26% from Friday’s close. Among these believers are economists at Morgan Stanley, Bank of America and Deutsche Bank. We have been of the opinion, as our subscribers are aware, that a bottom of the S&P 500 is somewhere around 3,300.

Despite Wall Street’s assumptions driving the market up since October lows, there remains too many solid indicators pointing toward pitfalls as well as dangers in these assumptions. Inflation remains (way) above the stated comfort number of 2% which the Federal Reserve has declared as its goal.

Upcoming market factors

Many of the tea-leaf readers working in the sales support departments of many brokerage firms continue to espouse an end to the Bear Market while believing that by doing so will encourage not only the investing public but create a self-fulfilling prophecy. This is puzzling given that they see the same indexes, indicators, charts, fundamentals and trends that we do. There are just too many indicators signaling that the current rally is at, or about to, reach saturation leading to what’s known as an ‘Overbought’ market. When sellers make their appearance again the sell-off could be ugly.

The next Consumer Price Index (CPI) is due on December 13th. If the CPI tops 8% inflation fears will spook the Fed into becoming more aggressive with rate hikes even though they are signaling a ‘bit’ of moderation at present. If this in fact does occur, look for a quick and ugly market sell-off. It was because the CPI announced a 7.7% inflation figure last month that the bulls rushed into the market creating the current market climate.

On Thursday, December 8th, the data on initial jobless claims, a great indicator of the health of the labor market, will be issued. Friday will see the release of the Producer Price Index (PPI). The PPI is a reading on wholesale inflation in November.

Since our goal here at GaneWisdom/Market Edge is to make the site understandable we try to include only information that will be a significant factor in helping our readers make an informed decision with their money. With this in mind, we do want them to be aware of certain pertinent factors directly indicative toward making that correct decision. A case in point is something known as ‘the Yield Curve’. Simply, when shorter-term Treasury yields rise above longer-term rates, what’s known as an ‘Inversion’ takes place. Inversions historically precede a recession. Although a yield curve is an excellent predictor of an economic slowdown, they are not very good predictors of when it will actually happen. We have now witnessed a Yield Curve. An Inversion has taken place.

Gaining vision through the smoke

What the average observer would consider good news is sometimes not really good news! A case in point is that 263,000 new jobs were created in November. But that is not real good news to the markets! The Fed tends to see these kinds of numbers as a cause for inflation to remain at the present levels or increase it. We already know how the Federal Reserve is combating inflation.   

As we’ve written these past weeks, there sure is a lot of assuming going on! But upon further review it is important to pay attention to what the Federal Reserve is actually saying. This past week Fed Chairman Jerome Powell, in speaking to the Brookings Institute, said “The time for moderating the pace of rate increases may come at the December Meeting (scheduled for the 13th & 14th). The word ‘may’ should not be mistaken for ‘will’ by the way. He went on to say, “History cautions strongly against prematurely loosening policy.” To reporters Powell sounded a bit more ominous: “Let me say this, it is very premature to be thinking about pausing when people hear ‘lags’, they think about pauses. Its very premature, in my view, to talk about pausing our rate hikes. We have a way to go.”

Another indicator we are keeping our eyes on is the rising cost of living (easy to spot when you review your grocery receipt) and fears about a recession have led to a much less demand for goods both in the US and abroad. Companies are reducing their purchases of raw materials at a rate not seen since 2008/2009 as well.

Other factors to consider

Technology stocks are seeing a consistent flight out of it’s sector into ‘safe haven’ stocks capable of weathering a recession. The NASDAQ 100 is actually trading near it’s Bear Market lows at the moment.

Another indicator we’ve discussed and watch as well, is the Volatility Index (VIX) which is also known as the ‘Fear Index’. When the VIX hits the number 30 it can be signaling a significant fear that the market will begin a downward movement from the viewpoint of investors. When the VIX reaches 40 -50 it will be radioactive. This index currently stands at 19.06 at the end of trading this past Friday which means that the ‘average investor’ has not bought into a quick end of the run-up currently ensuing in the equity markets. The VIX can be viewed on CNBC and other media outlets should you want to follow it. When this index begins to move upwards, say in the range of 27/28, pay close attention.

In conclusion

Typically, the stock market doesn’t bottom out until the Federal Reserve completes its cycle of interest rate hikes. We see this happening, barring something unforeseen happening, by the end of the 3rd quarter next year. Possibly the 4th. We could perhaps see a pull back in rates by year-end 2023.

The premise we hold is that it is not what you make, but what you keep that counts. We will take small losses to avoid big losses. The euphoria currently gripping Wall Street could turn to sorrow when the market reverses direction, not only significantly but quickly.

There will be a time to buy again, and we project that being the case when investors throw in the towel. This is known as a Panic Bottom, and we see that bottom happening when the S&P 500 hits 3,300 +/-

Our current market opinion therefore is for our subscribers to be in a cash (money market) position.

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