Stocks are likely going to be stuck in a trading range until the next Fed announcement on Wednesday, February first, states Steve Reitmeister of Reitmeister Total Return.
Why? Because investors have been burned many times before getting bullish in hopes of a Fed pivot that did not arrive. So even with signs of moderating inflation providing a modest lift to stocks of late...there is a limit to the upside until investors hear from the Fed again. There is also limit to the downside. And this begets a trading range. Let's discuss the shape of the trading range and possible outcomes after the Fed announcement. All that and more is on tap for this week's Reitmeister Total Return commentary.
In many ways, the trading range has already been in place for the past month flitting between 3,800 and 4,000.
And this is likely to stay in place as investors are fearful of reading the Fed tea leaves wrong as they have so many times this year. So even though there were welcome signs of moderating wage inflation (public enemy number one to the Fed) there are enough whispers from the Fed that their job is far from done.
One such whisper from the Fed recently came from Atlanta Fed President, Ralph Bostic. During his speech he shared that interest rates will get above 5% and hold there for a while. He was then asked how long would they remain elevated above 5% for which he stated emphatically. “Three words: a long time”.
This harkens back to December 14 when the market was on the verge of a breakout above the 200-day moving average before Powell slammed the door on that notion. He too repeated the three-word mantra (a long time) over and over again when discussing their plans for higher rates.
Plain and simple, Powell said that they fear damage from long-term inflation much more than the downsides that come with a recession. And thus, will remain aggressively hawkish until inflation is back down to the 2% target for good.
Investors got the memo loud and clear in mid-December leading to a -6% bearish run for stocks. However, bit by bit investors are forgetting the Feds message as stocks float back higher in the range.
The main thing creating a lid on stock prices at the moment is a combination of the 200-day moving average at 3,990 followed by the psychologically important 4,000 level. You could call that a double reinforced resistance level that will be hard to crack without clear and decisively bullish news from the Fed.
Right now, from a Fed policy perspective, I see little reason for investors to get seriously more bullish at this time. That’s because of the consistency of the higher rates for “a long time” mantra.
Also, consider that from an economic perspective, there are more and more signs of a recession forming early in 2023. Let’s refer to three key pieces of data from the past week that speaks loudly to worsening economic conditions:
First, was ISM Manufacturing declining to 48.4 last week as New Orders lower at 45.2 means that the worst is yet to come. (Remember under 50 = contraction).
Second, we find that things are not much better on the services side of the ledger as ISM Services dropped abruptly from 56.5 to 49.6. And here again, the forward-looking New Orders component was markedly worse at 45.2.
Let’s remember that the above services report was during December...the holiday shopping season when consumers normally put aside any concerns to spend lavishly on their families. However, there was much less “ho, ho, ho” in these results and much more “humbug”.
Lastly, on the economic front, the NFIB Small Business Optimism Index was, well, not optimistic. That comes through loud and clear as it came in at a six month low of 89.8 when under 100 = contraction.
Here too we see these business owners not feeling good about what lies ahead as the six-month business conditions outlook worsened with 51% predicting lower results ahead. The only positive to be found in this report is still ample job openings which likely keeps pressure on higher wages...which will keep the Fed on the offensive against inflation a good while longer.
To sum it up, I expect stocks to remain in this 3,800 to 4,000 trading range until we hear from the Fed. Or more specifically I think it will be very hard to break above that range.
On the downside, stocks could tumble lower before the Fed chimes in if the upcoming inflation reports are hotter than expected. That’s because investors would wisely read that information to mean that the Fed would stay aggressively hawkish a good while longer...thus increasing odds of recession and stock market downside.
This means we should put the following dates on our calendar:
1/12/23 = Consumer Price Index
1/18/23 = Producer Price Index
2/1/23 = Fed Rate Hike Decision and Powell Speech
Don’t give much credence to moves higher in the range for now as it likely will be all for not when the Fed takes the mic on February first. However, it is also possible that stocks crack lower before that if CPI or PPI shows inflation being too sticky which provides a foregone conclusion of what the Fed will do on that date.
Long story short, the smart money still rides on recession forming with a deeper bear market in the coming months. Please trade accordingly.