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For the stock market (SPY), the June 1 debt deal deadline appears to be looming. But it’s just a sideshow, distracting from what’s really important. 40-year investment veteran Steve Reitmeister explains what investors need to focus on to dominate the market in the coming weeks. Get his market outlook, trading plan and top picks in the fresh comments below.
The debt ceiling is a sideshow. Not a real theater. And it’s not the real reason stocks fluctuate.
The sad fact is that we are still stuck in a deadlock, not knowing if traffic will turn bullish or bearish from here. Meanwhile, investors are willing to trade every tiny ripple in the water, no matter how insignificant.
What really matters is the next big wave. Will it be bullish or bearish?
Solving that mystery will continue to be the key to investment success, and that is our focus today.
Market commentary
Last week’s story was that the stock had climbed to the S&P 500’s bullish breakout point of 4,200 (spy) about the news that a debt ceiling agreement is in the works.
And on Tuesday, stocks tumbled just over 1% as debt negotiations dragged on in typical Washington, D.C. fashion.
To avoid any mystery, let me explain how this unfolds from here.
Between now and the June 1st deadline, there will be plenty of political drama to unfold. This could include temporary funding agreements to allow long-term contracts to be entered into after expiration.
But one way or another, it’s always been, and always will be, one way or another. Stock prices will rise on the news. Perhaps it will cross the 4,200 mark for a while.
But even when the smoke clears, investors still face the same challenge. The question is whether a hawkish Fed eager to contain inflation will trigger a recession and a deep bear market, or whether that disaster is averted and paves the way for a more bullish rally.
as you know from my previous comment, I see the bearish case as the most likely. Because the Fed usually talks about making a soft landing when it hikes…and yet it failed 75% of the time because we actually had a recession.
This time they candidly say they expect a mild recession after all. So, assuming the same Fed margin of error, a deeper recession is likely on the horizon. As a result, earnings prospects will decline and stock prices will drop significantly. (Yes, below the October 2022 low of 3,491).
This debate has been central to the trading range scenarios we’ve dealt with throughout the year, with the bulls making as good arguments as the bears. Their main argument is that there will be no recession.
If the bulls or bears start making more compelling arguments, the market will swing in that direction. That means it’s most profitable to look for cues that tip the balance in either direction.
In this regard, there were some interesting notes to consider from key Fed officials this week. For background, remember that investors currently expect rates to freeze at this level with an 80% probability. Some might see this as the backbone of the doves and the reason they hold rallies.
Fed chief Neil Kashkari said:Not so soon! Here are the highlights of CNBC’s review:
“Then start raising again in July? It’s possible, but the most important thing for me is not to take it off the table.”
“The market seems to be very optimistic that interest rates will come down in the future. There are,” he said. “But no one should be confused about our efforts to bring inflation back to 2%.”
“This is the most uncertain time ever in terms of understanding the underlying inflation dynamics. We may have to go, ”the federal funds rate is 6%,” he said. “If inflation starts to come down due to banking stress, maybe … we may be nearing the end.
And on Monday, St. Louis Fed President James Bullard said he expected two more rate hikes to get inflation back to 2% on track. To be fair, he also believes recession odds are exaggerated and not an inevitable outcome of this process. (Remember again the 75% recession result when the Fed hikes rates.)
Finally, Fed Governor Bostic said a week ago that a rate cut is unlikely until 2024.
All of these statements go against current public expectations that investors expect that to happen in September. Fed members have vowed not to cut rates until 2024 and have consistently made clear their intention to keep rates high for the long term, so it’s hard to tell how many times investors can go wrong in this process.
Well, here is the Economic Catalyst Watch I shared my previous comment:
5/25 Unemployment insurance application– This alone is not strong enough as investors will seek cooperation from the 6/2 Government Jobs Situation Report. However, when unemployment claims begin to approach 300,000 per week, it marks a period in history where the unemployment rate will rise for a much longer period.
5/31 ADP Employment, JOLT– Two other employment reports serve as predictive indicators of monthly government employment status.
6/1 ISM Manufacturing, unemployment insurance application – We’ve had plenty of weak ISM manufacturing data, but they haven’t really signaled an approaching recession. But it’s still one of the key monthly reports for monitoring the health of the economy.
6/2 Civil Servant Employment Situation ~ The number of new jobs this month is expected to continue to fall to 180,000. Note that due to population growth, we need to add 150,000 jobs per month to keep the unemployment rate at a level. Therefore, a move below this mark could cause investors to predict worse numbers down the road. A lot of attention will also be focused on the factor of wage inflation. Because that relentless inflation is clearly a thorny problem for the Fed.
6/5 ISM service– Last month was in positive territory at 53.4. However, if it falls below 50 and enters contraction territory, the likelihood of a future recession will certainly increase.
6/14 Fed Meeting- More investors expect a pause in rate hikes. But that is quite different from the conversion to rate cuts, which they still claim is a 2024 event. So Powell’s press conference after the rate hike decision will be watched as a clue as to what happens next.
Finally, I hope investors don’t get caught up in a post-debt trading rally. Let’s clear the smoke from this event and return to the real debate of whether there will be a recession in the coming months. This determines whether the stock price will rise or fall.
The tips above will help you put the pieces together. However, if you find it difficult to understand everything, continue reading my commentary. There I am always on the lookout for action.
what next?
See my balanced portfolio approach for uncertain times. It’s the same approach that has beaten the S&P 500 by a wide margin in recent months.
This strategy was built on over 40 years of investment experience to understand the unique nature of the current market environment.
Neither bullish nor bearish at the moment. Rather confusing and uncertain.
However, given the facts at hand, we are most likely to see a bear market emerge from the hibernation that sent stocks down again.
Gladly, we can enact a strategy to not only survive that recession, but to thrive. After 40 years of investing, this isn’t the first bear market rodeo I’ve seen.
If you would like to learn more and view selected deals in my portfolio, please click the link below to initiate the right action.
Steve Reitmeister’s trading plans and recommendations >
I wish you success in your investment.
Steve Lightmeister…but everyone calls me Raity (pronounced “Raity”)
StockNews.com CEO, and Editor, Light Meister Total Return
SPY shares rose $0.26 (+0.06%) in after-hours trading on Tuesday. Year-to-date, the SPY is up 8.69%, compared to the benchmark S&P 500 index up 10% over the same period.
About the Author: Steve Lightmeister
Steve is better known to StockNews readers as “Reity”. Not only is he the CEO of the company, but he also talks about his 40 years of investment experience in his world. Lightmeister Total Return Portfolio. Read on for more on Reity’s biography and links to his latest articles and stock picks.
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