There were plenty of reasons to be bearish in the stock market (SPY) coming into 2023. This is especially true with inflation still too high, prompting the Fed to step up its aggressive behavior. And then came the specter of a potential banking crisis that only increases uncertainty… and that only increases the likelihood of a bear market. Read on below to discover Steve Reitmeister’s updated market outlook, trading plan, and top picks for staying on the right side of the market action.
The S&P 500 (SPY) has been downright clubbed for returning almost all of the hard-fought gains made at the start of the year. That sale ended on Tuesday with a welcome rally in aid.
But if we’re honest…there’s not much real relief in sight.
Let’s take a look at where we are now, what lies ahead for stocks and our trading plan to outperform.
We need to talk about the elephant in the room first. I refer, of course, to the serious concerns about the recent bank closures that give rise to “Ghosts from the past of the financial crisis“.
Now let me insert an important disclaimer.
I AM NOT A BANKING EXPERT!
And the sad fact is that 99% of the articles you’ve read in the past week aren’t written by banking experts either. So please appreciate that what I’m sharing comes from the perspective of an economics student with 43 years of active investing experience.
This seems more like smoke than fire… but there will probably be small wildfires here and there.
This means that after the 2008 financial crisis, there is much more banking supervision than before. Combine that with the fact that there is no equity bubble like last time in real estate…nor have we created new INSANE financial debt instruments that could implode the financial system.
Put all that together and it doesn’t sound like we’re on the verge of a banking system failure. However, there are isolated incidents of balance sheet weakness and mismanagement that need to be cleaned up. This is especially true for banks with too much cryptocurrency exposure.
Will more bank failures follow?
Probably. Unfortunately, there is great incentive on the part of hedge funds that short stocks to find weaknesses and exploit them to their advantage.
Heck, even Cramer has openly joked about how easy it is for a hedge fund to short a stock and then spread rumors that crush the stock price. Easy to choose.
This creates a major principal risk in the meantime, as each new bank failure will lead to more uncertainty. And that uncertainty comes on top of all previous concerns about inflation + Fed Hawkishness creating a recession and a deeper bear market. So now is a good time to move into that conversation.
Stocks were already sold out in February and early March when the road signs read: Careful ahead!
This means inflation was still too high, prompting the Fed to reinforce their aggressive rhetoric that rates were likely to move higher and stay in place longer than previously stated. And what was previously stated was that the rates would be a minimum of 5% and would be on the books until the end of 2023.
The previous idea was more than enough to grind the economy to a recession level. So the chance of even more hawks is why we spent the last six sessions under major psychological support at 4,000. And the last four sessions below the 200-day moving average at 3,940.
Now let’s think about an interesting idea mentioned in this article:
Rolling back a month ago, the Fed’s 3/22 meeting was believed to be accompanied by a 25 basis point rate hike, as we saw in February. Next came more aggressive stance from Fed officials, and the odds began to move toward a 50-point hike to more aggressively control inflation.
What would happen if the Fed stops rate hikes because of the banking crisis?
I actually suspect that investors would view that as a negative. That’s because it would send a signal to investors that the Fed is SERIOUSLY concerned about the stability of the banking system that they need to deviate so far from their aggressive plans.
This means that investors SHOULD NOT regard such a move as a dream move”soft spindleThis would rather be the Fed hitting the panic button that financial system stability is now more important than fighting inflation (which they have called Public Enemy #1 for over a year).
Because as crazy as it sounds… let’s all pray that the Fed continues to aggressively raise rates at the March 22 meeting, as a short pause could be much worse for stocks.
Note that the Consumer Price Index report came out on Tuesday morning. Yes, it was a lot better than expected at ONLY 6% year over year versus 6.4% previously. Please keep in mind that the inflation target is still 2% and we are still way off target.
For those who want to say that inflation really was a problem in the spring summer of 2022 and not really a problem today… unfortunately that idea is nonsense. The proof is the 0.4% month-over-month increase, which still indicates an annual rate of increase of 5%. (REMEMBER AGAIN the target level is 2%).
Wednesday 15/03 brings together the more forward-looking Producer Price Index report with Retail Sales. And after that, all eyes will be on the 3/22 Fed rate decision. then actually become dovish.
All things considered, this is still a bearish environment. Even if the banking issues weren’t on the agenda, I’d still be pounding the table on how the Fed’s actions open the door to recession and a natural deepening of the bear market.
However, if you sprinkle the uncertainty of the banking issues into the mix, and the serious headline risk ahead… that’s just another nail in the coffin for the early 2023 bullish ambitions.
This means that the 2022 bear market has gone into a mini hibernation to kick off the new year. Now it’s awake and hungry to devour stock prices even lower.
Not lower every day, week or month. But looking at the coming months, you should expect a lot more downsides. And yes, I suspect we’ll go even lower than 3,491 from October onwards.
That’s why the Reitmeister Total Return portfolio is built to make a profit as stocks continue to slide into bear market territory. Fortunately, it’s not too late to apply that strategy if you haven’t already.
What to do now?
Discover my brand new “Stock trading plan for 2023” covering:
- Why 2023 a “Jekyll & Hyde” year for shares
- How the bear market is coming back with a vengeance
- 9 Trades to Make Profit Now as Bear Returns
- 2 Trades with 100%+ upside potential when New Bull appears
- 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 Stocks. Year-to-date, SPY has gained 2.43% versus a percentage increase of the benchmark S&P 500 index over the same period.
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the company, but he also shares his 40 years of investing experience in the Reitmeister Total Return Portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.