Major Market Indices Dropped Early This Week Ahead of Last Fed Meeting: Market Commentary from Cabana’s CEO – December 8, 2022

1 year ago

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It appears to me that investors may have once again sold the most recent rally attempt in stocks, which began in the middle of October. Despite surviving a test of support at the 3900 level two weeks ago, clearing 4000 (SPY) and favorable seasonality, the major equity indices all immediately dropped as soon as the S&P 500 reached its 200-day moving average and the downward sloping trendline developed over the term of the 2022 bear market. From a technical standpoint, this was a logical spot for the legitimacy of any bounce to be tested. As of market close yesterday, we found ourselves battling once again to hold support at 3900. I feel like the odds favor more short-term downside and that we are again headed lower as the bear market rolls on. Today, we saw a little relief in the form of an up day for stocks, after five consecutive down days for the S&P 500. I don’t think this changes the picture, but rather may only postpone the inevitable, I will provide a big caveat to this gloomy outlook, and it is that we have one more CPI number coming out on Tuesday and the Federal Reserve’s last meeting concluding on Wednesday. The information and guidance coming our way next week has the ability to immediately change things. Investors are making decisions on a day-to-day basis and the importance of the data we get next week cannot be overstated (in my opinion), in the short-term direction of the stock market. A continuing drop in CPI numbers coupled with a dovish Fed Statement may propel stocks markedly higher through the end of the month. I hope that is the case but am not counting on it. 

In looking forward over the medium to longer term, the bond market is pricing in a near certain recession next year as evidenced by rapidly falling long-term interest rates and much higher short-term rates. The 10-year Treasury note is now all the way back down to 3.5%. The 2-year Treasury note is at 4.3%. This is the largest inversion of the yield curve since the 1980s and a very troubling sign for the economy. All in all, it is my opinion that the best we can hope for is some quick gains over the short term followed by another leg down as the country falls into recession in 2023. Again, this is just my opinion, and you know what they say about opinions. 

The bigger question is why does it have to be this way? Our Central Bank (our government) has decided to risk cratering the economy while putting people out of work, all in hopes of fulfilling its mission of achieving a 2% inflation rate. Why is a 2% inflation rate even important? Why not 3% or 4% or 1.5%? Shouldn’t some type of totality of the circumstances be factored in. Whoever came up with this hard number is in my view missing the forest for a couple of trees. Unfortunately, this firm “policy” may cause more than a little pain to investors, businesses and workers over the coming months. If history is any indication that will be the case. 


January 17, 2024

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