The swings today, September 8, are a good reminder of how volatile this market is.
The Standard & Poor’s 500 broke to the upside with a gain of 0.80% as of 11:20 New York time.
Then, with Fed chair Jerome Powell emphasizing the central bank’s intention of controlling inflation, stocks retreated with the S&P 500 down 0.55% at 12:20 p.m.
And then, in the last hour, stocks have moved up again with the index showing a gain of 0.38% as of 1:30 Nw York time.
I expect to see this kind of volatility for at least the next few days–through September 13–and maybe even somewhat longer.
But I think investors and, more especially traders, should be looking for another Bear market rally to begin after the Federal Reserve’s September 21 meeting.
How confident am I on this call? Nothing is ever guaranteed in the financial markets, of course, but I’d give this scenario better than 75% odds of being correct.
Here’s the setup behind this call and why I’m so confident.
We get new Consumer Price Index inflation numbers on Tuesday, September 13. I expect that the August report will show another dip in headline inflation. Economists surveyed by Bloomberg are projecting a drop to 8.1% from 8.5% in July and from 9.1% in June.
You can see a clear pattern, right? Inflation has peaked and Federal Reserve policies are working. Which would put an end to Federal Reserve interest rate increases
Frankly, I think this pattern means less than investors and Wall Street are likely to think it does.
The Fed has said over and over again that it continues to target a 2% inflation rate. Getting there from even an 8.1% inflation rate in August will require, several Federal Reserve officials have said recently, raising the Fed’s benchmark rate to something like 6% rather than the 3.8% financial markets have priced in.
Why the financial markets refuse to listen to the Fed’s much-repeated message is a testament to how embedded expectations for low interest rates are, and how slowly those expectations are changing.
With those expectations in mind, investors are likely to see a big 50 basis point or even better a bigger 75 basis point increase in interest rates at the Fed’s September 21 meeting as a good thing. Such an aggressive move by the Fed would bring us closer to an end to this cycle of interest rate increases and closer to those still-expected interest rate cuts in 2023.
In other words, if we get a slight (and essentially meaningless) dip in the headline CPI inflation rate next week and a big interest rate increase from the Fed on September 21, it will clear the way for investors to resume riding the “early interest rate cuts in 2023” hobbyhorse.
And with the resumption of that ride, I’d expect stocks to take off again. With the S&P 500 posting another 10% gain before this rally fails sometime in December or January at the latest and much earlier if we follow the July rally pattern.
I’d expect technology stocks to show even bigger gains. Just look at their outperformance in today’s morning trading. These shares have been mauled by the Bear and everyone is looking to get in on the bounce or bottom or whatever. Because, after all, that is the lesson of the last Bear market or two. Those who jump in early–before the recovery is clear–will reap huge gains.
Except that this time, as I’ve argued in my Special Report: Your Best Investment Strategy for the Next Five Years, this rally will be followed by disappointment as investors realize the Fed is actually serious about continuing to raise interest rates significantly in 2023. And when that reality hits investors, I expect another down leg in this Bear market. I’m not looking for a bottom until the second half of 2023 at the earliest.
My recommendation is to treat the very likely rally that will begin soon as another Bear market rally. Which means continue to sell into strength rather than buy. You want to have a big cash position to put to work when we get that real bottom in 2023.
I’ll have more specific sell recommendations if this Bear market rally materializes as I expect. And remember there’s no reason not to enjoy any gains from this rally. They’re real. Just make sure you hang onto them when the Bear growls again.
