Stocks are making lower lows, and lower highs

Stocks are making lower lows, and lower highs

After dropping 10% in almost a straight line, the S&P 500 Index bounced higher this week in yet another relief rally. The bulls are putting up a determined fight to stave off what now seems inevitable to me—a retest of the year’s lows in the weeks ahead.

The trigger for that decline will likely be the September 20-21, 2022, FOMC meeting. Despite the warnings from all the members of the Federal Open Market Committee, including Chairman Jerome Powell, many on Wall Street still hold out hope that the Fed does not mean what they say.  The message couldn’t be clearer—don’t expect a dovish pivot.

The betting by the bond vigilantes is that the Fed will raise interest rates by another 75 basis points at their next meeting. None of the week’s Fed speakers disputed this assumption. The central bankers continue to say they need more than a few months of data points to determine when they might be able to take their foot off the monetary breaks.

As lates as this Thursday, September 8, 2022, Chairman Jerome Powell warned the bulls: “I can assure you that my colleagues and I are firmly committed to this project, and we will keep at it until the job is done.”

And yet, an extremely savvy financial advisor I respect sent me the following text.  “I don’t see them raising 75 (basis points) in September,” he insisted. “I think we get 50 with more dovish language. Inflation is coming down more than they think.”

I don’t fault his thinking. After more than a decade of investing with the Fed supporting the financial markets, it is extremely difficult for many professionals to change their mindset in less than a year. Two thirds of financial professionals barely remember a time when this wasn’t so.

In the meantime, world economies are continuing to roll over. The energy crisis, runaway inflation, geopolitical tensions, and COVID-19 have combined to hamstring country after country. China continues to open and close their economy depending on the number of COVID-19 cases. This disruption in the second-largest economy in the world has impacted economic growth and slowed the rest of the world’s economies as well.

Europe has its own set of problems. Aside from the woes plaguing the rest of the globe, the Ukraine War heads into another winter of strife. The Russian embargo of natural gas to the European Community in response to economic sanctions, is hurting Europe and its currency.  Alternative sources of energy (nuclear, solar, coal) can’t take up the slack and energy-driven inflation is running above 8%.   The present scheme by the EU and the U.S. is to cap the price of Russian oil, although I suspect that is easier said than done.

The European Central Bank (ECB) raised its’ key deposit interest rate this week by 75 basis points from zero, and lifted its main refinancing rate to 1.25%, the highest level for both since 2011. Analysts expect (and the ECB confirmed) more rate rises ahead in order to combat inflation.

The ECB sees the economy stagnating into 2023, predicting a range of anywhere between am expansion of 0.9% to a decline of 0.9%, but has not yet used the “R” word in its forecasts. In the meantime, the euro has sunk below parity with the U.S. dollar.

As for the markets, stocks continue to behave in line with my expectations. We hit 3,886 on the S&P 500 Index and bounced off that level. I expect we may have some room to the upside into next week. Next Tuesday, the Consumer Price Index (CPI) data will be revealed. Over the last two months, we have seen the inflation data decline a little. Expectations are that we will see another cooler number. If the number does indicate less inflation, that could support the markets and even push the S&P 500 to the mid-41,00 level. At that point, another decline into the FOMC meeting would be my guess.  If my scenario plays out, I expect the next low will be even deeper. Ultimately, I expect the Fed’s actions this month could take us to the lows of the year or lower.

Bill Schmick is registered as an investment advisor representative of Onota Partners, Inc., in the Berkshires.  Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI).  None of his commentary is or should be considered investment advice.  Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at bill@schmicksretiredinvestor.com .Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.