There were plenty of reasons to be bearish on the stock market (SPY) coming into 2023. This is especially true with inflation still too hot leading the Fed to increase their hawkish behavior. And then came along the specter of a potential banking crisis that only increases uncertainty…and that only increases odds of bear market. Read on below to discover Steve Reitmeister’s updated market outlook, trading plan and top picks to stay on the right side of market action.
The S&P 500 (SPY) has been downright bludgeoned of late giving back nearly all of the hard fought gains from the start of the year. That selloff ended Tuesday with a welcome relief rally.
However, if we are being honest…there is not much real relief in sight.
Let’s review where we stand now, what lies ahead for stocks along with our trading plan to outperform.
Market Commentary
We have to talk about the elephant in the room first. Of course, I am referring to the serious concerns over the recent bank closures that evoke “Ghosts of Financial Crisis Past”.
Now let me insert an important disclaimer.
I AM NOT A BANKING EXPERT!
And the sad fact is that 99{1652eb1ffa4184925f6a63a9c04ea6b421acb7a78117241e7d4325cdca8339fa} of the articles you have read this past week are not written by banking experts either. So please do appreciate that what I share comes from the perspective of an Economics major with 43 years of active investing experience.
This seems like more smoke than fire…but there likely will be small brush fires here and there.
Meaning that after the financial crisis of 2008 that there is much more bank oversight than the past. Combine that with the fact that there is not an equity bubble like last time in real estate…nor have we created new INSANE financial debt instruments that could implode the financial system.
Add that all up and it doesn’t sound like we are on the brink of systemic failure of the banking system. However, there are isolated incidents of balance sheet weakness and mismanagement that needs to be cleaned up. Especially true for banks with too much crypto exposure.
Will there be more bank failures?
Most likely yes. Unfortunately, there is great incentive on the part of hedge funds that short stocks to find any weakness and exploit it to their benefit.
Heck, even Cramer has openly joked about how easy it is for a hedge fund to short a stock then circulate rumors that crush the share price. Easy pickens.
This creates great headline risk in the mean time as each new bank failure will lead to more uncertainty. And that uncertainty is on top of all the previous concerns about inflation + Fed Hawkishness creating a recession and deeper bear market. So now is a good time to transition to that conversation.
Stocks were already selling off in February and early March as the road signs read: Caution Ahead!
Meaning that inflation was still too hot leading the Fed to heighten their hawkish rhetoric that rates would likely go higher and stay in place longer than previously stated. And what was previously stated was that rates would get to at least 5{1652eb1ffa4184925f6a63a9c04ea6b421acb7a78117241e7d4325cdca8339fa} and be on the books through end of 2023.
The previous notion was plenty ample enough to grind the economy down to recessionary levels. Thus, the odds of even more hawkishness is why we have spent the last six sessions under key psychological support at 4,000. And the last four sessions under the 200 day moving average at 3,940.
Now let’s ponder an interesting notion mentioned in this article:
Goldman Sachs no longer expects the Fed to hike rates in March
Rolling back a month ago it was assumed that the 3/22 Fed meeting would come hand in hand with a 25 basis point increase in rates as we saw in February. Next came more hawkish posturing by Fed officials and the odds started to move towards a 50 point hike to more aggressively get inflation under control.
So, what would happen if the Fed paused rate hikes because of the banking crisis?
I actually suspect that investors would take that as a negative. That is because it would be a signal to investors that the Fed is SERIOUSLY worried about the stability of the banking system that they have to deviate so significantly from their hawkish plans.
Meaning that investors SHOULD NOT consider such a move as a dreamed of “dovish pivot”. Rather this would be the Fed hitting the panic button that the stability of financial system is now more important than fighting inflation (which they have dubbed as Public Enemy #1 for over a year).
For as funny as it sounds…let’s all pray that the Fed continues to hike rates aggressively at the 3/22 meeting as pressing pause could be much worse for stocks.
Note that on Tuesday morning the Consumer Price Index report came out. Yes, it was a notch better than expected at JUST 6{1652eb1ffa4184925f6a63a9c04ea6b421acb7a78117241e7d4325cdca8339fa} year over year vs. 6.4{1652eb1ffa4184925f6a63a9c04ea6b421acb7a78117241e7d4325cdca8339fa} previously. Please don’t lose sight that the inflation target is still 2{1652eb1ffa4184925f6a63a9c04ea6b421acb7a78117241e7d4325cdca8339fa} and we are a long way off the mark.
For those that want to say that inflation was really a problem in the Spring of Summer of 2022 and not really that much of an issue today…unfortunately that notion is hogwash. The proof is the 0.4{1652eb1ffa4184925f6a63a9c04ea6b421acb7a78117241e7d4325cdca8339fa} increase month over month which still points to a 5{1652eb1ffa4184925f6a63a9c04ea6b421acb7a78117241e7d4325cdca8339fa} annual increase pace. (AGAIN remember that the target level is 2{1652eb1ffa4184925f6a63a9c04ea6b421acb7a78117241e7d4325cdca8339fa}).
Wednesday 3/15 brings the more forward looking Producer Price Index report along with Retail Sales. And then after that all eyes will be on the 3/22 Fed rate decision. than actually becoming dovish.
Adding it altogether, this is still a bearish environment. Even if the banking issues were not on the docket I would still be pounding the table on how the Fed’s actions open the door to a recession and natural deepening of the bear market.
However, when you sprinkle the uncertainty of the banking issues into the mix, and the serious headline risk that lies ahead…that is just a nail in the coffin for early 2023 bullish aspirations.
Meaning that the 2022 bear market took a mini-hibernation break to start the new year. Now it is awake and hungry to devour stock prices even lower.
Not lower every day, week or month. But as we look out over the next several months you should expect much more downside. And yes, I suspect we will go even lower than 3,491 level from October.
That is why the Reitmeister Total Return portfolio is built to profit as stocks descend further into bear market territory. Gladly it is not too late to apply that strategy if you have not already.
What To Do Next?
Discover my brand new “Stock Trading Plan for 2023” covering:
- Why 2023 is a “Jekyll & Hyde” year for stocks
- How the Bear Market Comes Back with a Vengeance
- 9 Trades to Profit Now as Bear Returns
- 2 Trades with 100{1652eb1ffa4184925f6a63a9c04ea6b421acb7a78117241e7d4325cdca8339fa}+ Upside Potential When New Bull Emerges
- And Much More!
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return
SPY shares . Year-to-date, SPY has gained 2.43{1652eb1ffa4184925f6a63a9c04ea6b421acb7a78117241e7d4325cdca8339fa}, versus a {1652eb1ffa4184925f6a63a9c04ea6b421acb7a78117241e7d4325cdca8339fa} rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
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