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Since January 3rd investors have enjoyed a respite from the doom and gloom that seemed consistent during 2022. During these past weeks, all of the major indexes enjoyed positive returns but none more so than the Small Cap and Nasdaq markets. Sadly, it now appears that reality has once again become the unwanted party-crasher and has overturned the banquet tables.
As we’ve discussed many times in these posts, retirement account balances had a difficult year in 2022. According to research done by Fidelity Investments, of 43 million retirement accounts the company ‘manages’, 401k balances fell more than 20%. Along with this the balances for other retirement accounts fell sharply as well. Those with 403Bs, such as schoolteachers, hospital workers, and charities saw average declines of 19% while participants in IRAs saw the steepest declines at 23%. Vanguard, another investment ‘management’ company saw the balances of their retirement accounts fall an average of 20% in 2022. Unfortunately, too many financial firms use the word ‘Management” loosely.
As our subscribers are aware, there is a serious conundrum happening in the economy, that being the stronger the economy the greater emphasis the Federal Reserve will push back. The reason being their goal of reducing the rate of inflation. When in the final months of 2022, inflation appeared to be easing, there was a consensus among many that the Feds would ease up not only on the amount of the interest rate hikes (which had been ¾ % hikes) but that they may actually slow down. This assumption caused the markets to post the best quarter of 2022. As our readers know, this assumption has not been part of our vocabulary here on GaneWisdom/Market Watch.
The Labor Department issued data this past week showing layoffs and jobless claims remaining below pre-pandemic levels and Friday the Commerce Department released their data showing a rebound in spending and personal incomes. Now all of this may seem confusing – ‘how can good news be bad?’ but this rash of what seems like positive news can (and very well may) prompt the Feds to push even harder to reach their stated goal of an inflation rate of 2% and become more aggressive in their rate hikes.
January saw an increase of 1.1% in consumer spending which is the largest monthly increase since March 2021. These items included large purchases such as cars, clothing, consumer goods and even hotel stays! Additionally, the Personal Consumption Price Index (PCE) – the Fed’s preferred gauge of inflation - rose 0.6 percent in January, which was higher than the 0.4% predicted by government analysts. These are numbers that scare the Federal Reserve and Wall Street reacted to these numbers this week by closing out it’s worst week since early December.
The S&P 500 – the best indicator of the stock market as a whole – fell 1.1% last week extending it’s third straight weekly loss. Friday’s S&P close stood at 3,970 down 42 points. The Dow Jones lost 336 points closing the week down 1% at 32,816 and the Nasdaq composite lost 195 points to close at 11,394 down 1.7% for the week. Small Caps were down 2.91%. Friday’s reports showed that the measure of preferred inflation by the Fed (2%) is becoming more elusive and in fact showed that prices were 4.7% higher in January than one year ago! Economists had expected an increase of 4.3% so these numbers, at least to the Fed, are moving in the wrong direction with inflation, at both the consumer level as well as the wholesale level, being higher than expected in January.
Wall Street had been expecting (read: counting on) the Federal Reserve to bring rates to 5.25% (currently at 4.50% – 4.75%) and stay there. The Street now is beginning to accept the premise that rate hikes will become more aggressive as well as top out at a much higher level. And keep them there! The anticipations of rate reductions in 2023 are slowly fading.
Keep in mind the following: The current interest rates as stated above, are 4.50% - 4.75%. Last year at this time the rate was virtually at zero!
As expectations for a tighter monetary policy for the Fed becomes likely, the yields on 10-year Treasury bonds rose to 3.94% from 3.89%. this is the rate that helps set mortgage rates and other important loans. The 2-year Treasuries, which moves on expectations of the Fed, rose to 4.79% from 4.71%. This rate is now closing in on its highest level since 2007! 30-year fixed mortgage rates are currently (nationally) at 6.87% while 15-year mortgages stand at 6.07%
What does all of this mean to you?
Friday’s sell off broke solid support levels (a measure we use to gauge the strength of the market both individually as well as broadly) which raised the possibility of larger declines in the market over the coming weeks. As our subscribers know, we watch the markets continually and what we’ve observed these past few weeks, but especially this week, is the speed which the market turned bearish. Within a matter of days!
Last week we wrote:
If you’ve ever sailed, especially in the early morning, fog banks can appear quickly. When they do you must rely on navigational equipment such as a compass and be (very) familiar with the charts you’re using for the area. This sounds a bit like what we’re experiencing in this current market. We are relying on the indicators that are being shown, the analysis that we’re performing and the strategies we utilize which are based on these factors. As we’ve stated on previous posts – we are sailing in uncharted waters, therefore we will continue to use those approaches and procedures that we base our opinions and advice upon and not emotions.
We fully expected, based on our numbers, to see a Panic Bottom, where the S&P 500 would sink to 3,300 +/- that would create a tremendous buying opportunity as well as shake out the dust of the market. It is appearing that this is not in the cards, so to speak. Therefore, we are remaining in a bullish sentiment. Should the S&P 500 close above 4,300 we will project an end to the Bear Market.
Although we still hold to our analysis should the S&P 500 closing above 4,300, however the abrupt changes these past trading days have made our pronouncements concerning the Panic Bottom valid once again.
During the past week, we sent out multiple Alerts:
On Wednesday 2/22/23 –
We are issuing a SELL order for the following:
Small Cap Funds
S&P 500 Funds
Transfer to CASH (Money Market) before the close of business on February 23, 2023
On Thursday 2/23/23 -
Transfer Nasdaq 100 Index Funds to Cash (Money Market) before the close of business
on February 24th, 2023
Our philosophy, as you’ve likely read on our website is to take small losses, if need be, in order to avoid large losses. We think you’ll agree that making up a 2% or 3% loss for example, is easier than making up a 20% or 30% loss.
Based on our market analysis, our recommendation is for our subscribers to transfer all positions to Cash (Money Market) accounts at the present time.