Imagine viewing the closing numbers of the three major stock market indexes on the first trading day of 2022 (January 3rd) and know you were looking at the peak of the markets through December 16th! It would probably be a bit unnerving to say the least yet, this is what exactly would have transpired!
Facts can be stranger than fiction as they say and when we observe that at the close of business on January 3rd the Dow Jones Industrial Average stood at 36,585, the S&P 500 at 4,796 and the Nasdaq Composite at 15,832. Friday’s (12/16/22) close saw the Dow at 32,920 (-3,665pts/-10% YTD), the S&P 500 at 3,852 (-944 pts./-19.5% YTD) and the NASDAQ Composite (-5,127 pts./-32% YTD).
Within the past week the Dow lost 1.7%, the S&P 500 down 2.1% and the NASDAQ Composite down 2.7%. What makes these numbers a bit more significant is that they are posted in a week that saw a rise in the Dow of 717 pts, the S&P 500 up 85 pts and the NASDAQ Composite up 252 pts. Monday and Tuesday and despite these impressive numbers still turned in a loss by week’s end.
As you know we follow many market indicators, among them daily and weekly graphs (known as ‘charts) and for many weeks they have signaled a lack of strength in any significant, long term market advances. In point of fact, they have continually broadcast a downturn.
“The upcoming week could be a pivotal one for the market, especially if the CPI were to jump higher than 8.7% as we’ve written above. Based on a number of the indicators we follow; it is our opinion that the market has topped out and is headed south. The Federal Reserve has been fairly open about a ½% rate hike at this week’s Federal Open Market Committee (FOMC) meeting. Although it seems to us that this number will hold, if the CPI number were to present an alarm bell the Feds could certainly go with a ¾% increase. We won’t speculate the chaos if that were to transpire.”
Although the Consumer Price Index (CPI) data was much more encouraging than was forecasted (and the reason for the temporary market increases at the beginning of the week) the Federal Reserve put a damper on the market’s holiday spirit.
As expected, the Fed raised interest rates by ½% but with the admission that more increases were assured for 2023, several Federal Reserve officials predicted that a recession will occur next year and also stated that inflation will take longer to control than was originally thought. Along with the forthcoming rate hikes, this news sent the likelihood of the ‘Santa Claus Rally’ and any major market upturns unlikely.
The latest data from November continues to show that 63% of Americans are living paycheck to paycheck and as interest rates continue to rise will continue to borrow heavily just to purchase life’s essentials and survive day to day. Sadly, car repossessions are now climbing back to pre-pandemic levels as well. There will come a time when consumers ease up on borrowing and spending and this will further increase the likelihood of a recession.
Make no mistake – what we’ve witnessed these past few weeks was a Bear Market Rally, albeit an unusually strong one. Large Cap, Mid Cap, Small Cap and the Technology sectors are in retreat at the moment. In the past two weeks the Small Cap sector – which when advancing is a healthy market sign - has lost nearly 7% of its value. Investors are beginning to show a bit of concern regarding the current markets as well as confirmed by the Volatility Index (VIX) otherwise known as ‘the Fear Index’. Rising a bit this past week, the VIX should it continue its upward trajectory, will be a signal that investors may be throwing up their arms and begin cashing in.
We see a Panic Bottom – where everyone throws in the towel and sells – happening over the coming months. Possibly (but not likely) weeks. A figure of around 3,300 in the S&P 500 may signal a market bottom. When this occurs, it will be the time to once again jump back into the market. For now, safety is the word of the moment.
Our position continues to remain in (or transfer) to cash (Money Market)