January offered a rip-roaring start for stock investors, states Steve Reitmeister of Reitmeister Total Return.
The +6.2% result for S&P 500 (SPX) barely scratches the surface of how Risk On the month was versus the generous gains for many of 2022's most beaten-down growth stocks. The party continued when the calendar first flipped to February. But then investors got served a series of far too hot inflation reports that reminded them the Fed's fight was far from over.
Their stocks headed lower with a -5% drop from the February peak to the current valley. This sets up for a very interesting month of March with many potential catalysts on the calendar that could have stocks racing higher again...or more likely breaking back into bearish territory. Let's dig deeper into the current market landscape to get our portfolios ready for what lies ahead.
Market Commentary
The best way to set the backdrop for the February sell-off is by reminding everyone of this equation:
Higher Rates on the Way (5%+) + Higher Rates in Place 'til at Least the End of 2023 + 6-12 months of lagged economic impact + Already weak economic readings = Fertile soil to create a recession and thus an extension of the bear market with lower lows on the way.
That sets the stage for March being the battleground for the soul of the market. Meaning are we still in a bear market or is the new bull market ready to emerge for good? The upcoming slate of economic reports will answer that question. Here are the key dates to keep in mind:
3/1 ISM Manufacturing
3/3 Government Employment, ISM Services
3/14 Consumer Price Index (CPI)
3/15 Producer Price Index (PPI), Retail Sales
3/22 Fed Meeting with Interest Rate Decision and Economic Projections
As for the 3/1 ISM Manufacturing report that is expected to be weak once again with a 48.0 forecast, which is up slightly from last month at 47.4. Interestingly we may have seen a foreshadowing of an even weaker-than-expected result given Chicago PMI on Tuesday dropped to 43.6. This regional report is considered the most telling for what shows up in the national ISM survey. Interestingly, weak economic numbers are not moving the market needle that much. The real battles are taking place over the inflation reports.
Thus, things will get more interesting starting mid-month with the two key inflation reports (CPI & PPI) which investors will use to predict what is coming a week later with the Fed announcement. Given the recent slate of reports pointing to far too hot inflation, it would take a minor miracle to push the Fed off their current hawkish trajectory. Anything is possible with this stock market. No doubt you would agree given all the crazy ups and downs of the past year.
However, at this moment I still believe the long-term trajectory calls for an extension of the bear market with new lows in hand by mid-year. The most interesting part is when we will finally see the market finally crack and head lower once again. I sense these events in March should provide the necessary catalysts for the next big market move. With CPI on 3/14 and PPI on 3/15, it could indeed be a “Beware the Ides of March” situation.
Thus, I would recommend preparing your portfolio for the next leg down in the days ahead. Because once we break below support at the 200-day moving average (3,940) there will likely be a quick and painful FOMO rally to the downside. Those who bet properly on this market downside should be handsomely rewarded.
