The S&P 500 (SPY) appears to be on the verge of an vital breakout above the important thing degree of 4,000. That’s as a result of some are applauding the decreasing of inflationary pressures. Nevertheless, the flip facet of that coin is that that is taking place due to a recession looming on the horizon that gives ample cause to stay bearish in 2023. Because of this 40 12 months funding veteran, Steve Reitmeister, begs traders to open their eyes to understand what is occurring now. And tips on how to commerce this nonetheless bearish market setting. Learn on under for the complete story.

The early 2023 rally was all the time too good to be true. That’s as a result of the myopic concentrate on moderating inflation wants to provide option to a broader view of the looming recession which ought to have traders hitting the promote button in earnest as soon as once more. Not only a momentary pause like we noticed Wednesday and Thursday.

We have to take a deeper dive on this battle between traders targeted on inflation information versus these trying on the general financial image. You already know that I stand with the latter group which is why the bearish drum beat is just rising louder in my ears.

The standoff between bulls and bears would be the focus of this week’s dialogue.

Market Commentary

The inflation vs. recession battle took heart stage on Wednesday when 2 key financial stories had been launched concurrently at 8:30am ET: Producer Worth Index (PPI) and Retail Gross sales.

The a lot decrease than anticipated PPI report bought everybody’s consideration out of the gate resulting in a surge in inventory costs over the important thing resistance degree at 4,000 for the S&P 500 (SPY) The following factor the downward momentum begins and saved chiseling away all day lengthy. That is how shares bought off 2% from peak to valley ending the session at 3,928.

These traders myopically targeted on inflation had been left scratching their heads.

Those that had been targeted on the purple flags within the Retail Gross sales report knew darn nicely why shares had been heading decrease. That being one other nail within the recessionary coffin for the US financial system.

To be clear, inflation is completely coming down at a faster tempo than most anticipated. This does imply that hawkish Fed insurance policies are working. They usually might pivot to dovish sooner than anticipated…however not for fairly some time. That message was echoed as soon as once more on Friday by Fed Governor Waller when he stated:

“…we nonetheless have a substantial option to go towards our 2 p.c inflation purpose, and I anticipate to help continued tightening of financial coverage”

HOWEVER, the actual cause inflation is moderating is as a result of we at the moment are teetering on the sting of a recession. This got here by way of loud and clear from recessionary alerts from a myriad of January financial stories like:

• 48.4 ISM Manufacturing on 1/4 with 45.2 New Orders (reads recession)
• 49.6 ISM Companies on 1/6 with 45.2 New Orders (reads recession)
• 89.8 NFIB Enterprise Optimism Index on 1/10 (decrease studying than throughout Covid…reads recession)
• -32.9 NY Empire State Manufacturing Index (lowest studying since Could 2020 when the financial system was in downright collapse).

And sure, the Retail Gross sales report that arrived facet by facet with the PPI report Wednesday morning bodes in poor health for the state of the patron. The -1.1% month over month decline is all of the extra stunning whenever you notice we’re speaking about December retail gross sales…sure, the usually buoyant Christmas procuring season was underwater.

This can be a very typical sample for a recession induced by excessive inflation. Give it some thought this fashion…when you’re afraid of rampant inflation, meaning if you happen to don’t purchase now the worth might be far too excessive sooner or later.

At first this creates spectacular financial progress as demand is pulled ahead (purchase now). After which a cliff is created as consumers are tapped out with much less to spend sooner or later. That contraction = recession. That cliff is probably going what we noticed in these week vacation procuring outcomes in addition to different early 2023 financial information.

Certainly, moderating inflation is nice information in isolation. And it does possible say the Fed won’t should go as excessive with charges or preserve them aloft as lengthy.

Alternatively, please admire that that is all taking place as a result of we’re in month 10 of this hawkish regime that’s possible producing a recession that begets decrease demand that begets decrease costs.

So if it took 10 months to create this consequence, and we’re sinking into recession, and the Fed has already stated they might preserve charges excessive for “a very long time”. then we’ve got to understand how lengthy it is going to take for any pivot to dovish Fed insurance policies to resurrect the financial system.

Like finish of the 12 months…or 2024. And whenever you totally admire that image of recession coming earlier than restoration…it makes it all of the more durable to get actually 100% gung ho bullish right now.

So does that imply now could be the time to be ferociously bearish? Sure and no.

YES…that is the logical consequence from what I stated above. Particularly given the teachings of historical past the place recessions are the main reason behind bear markets.

NO… is that the market can typically have a thoughts of its personal and take a distinct path. Very true when computer systems do extra of the heavy lifting than precise human traders. So concern and greed will not be fairly the identical as historic patterns.

Lengthy story quick, I anticipate issues to roll additional bearish as extra traders broaden their focus from simply the inflation image to the general well being of the financial system. The extra they learn recession, and with it decrease company earnings, the extra possible shares head decrease from right here.

That’s as a result of the main reason behind bear markets is the state of the financial system…the place recession = bear market.

So preserve your eyes firmly fastened on that financial image to information your investing choices from right here. The present clues level to extra draw back forward. Nevertheless, that won’t totally happen till after the February 1^st Fed announcement the place Powell will as soon as once more remind bulls that he didn’t stutter when he stated that charges might be excessive for a very long time. And that very long time is way from over.

What To Do Subsequent?

Uncover my particular portfolio with 9 easy trades that can assist you generate features because the market descends additional into bear market territory.

This plan has been working wonders because it went into place mid August producing a strong achieve for traders because the market tumbled.

And now could be nice time to load again as we take care of yet one more bear market rally earlier than shares hit even decrease lows within the weeks and months forward.

When you have been profitable navigating the funding waters this previous 12 months, then please be happy to disregard.

Nevertheless, if the bearish argument shared above does make you curious as to what occurs subsequent…then do think about getting my up to date “Bear Market Recreation Plan” that features specifics on the 9 distinctive positions in my well timed and worthwhile portfolio.

Click on Right here to Be taught Extra >

Wishing you a world of funding success!

Steve Reitmeister…however everybody calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Whole Return

SPY shares fell $0.13 (-0.03%) in after-hours buying and selling Friday. Yr-to-date, SPY has gained 3.52%, versus a % rise within the benchmark S&P 500 index throughout the identical interval.

Concerning the Creator: Steve Reitmeister

Steve is best recognized to the StockNews viewers as “Reity”. Not solely is he the CEO of the agency, however he additionally shares his 40 years of funding expertise within the Reitmeister Whole Return portfolio. Be taught extra about Reity’s background, together with hyperlinks to his most up-to-date articles and inventory picks.

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