A dovish central bank is providing some market relief on Friday morning, but it is the Chinese central bank and not the Federal Reserve that is cutting interest rates. The move by the People's Bank of China (PBOC) is meant to help prop up the struggling Chinese real estate market and to help deal with falling growth due to the zero COVID program that has shut down major areas of the economy.
China has very different circumstances than those in the US, but there is some positive spillover to US equities based on the thinking that inflation may cool off due to slowing economic growth. Poor earnings from retailers this week sparked a surge in worries about a potential recession. While much of the market has been skeptical of the potential for a soft economic landing, there was still enough optimism to provide some support for stocks.
This week we have seen a shift as fear of stagflation gains traction. While slowing growth is one way to fix the inflation problem, there is still the potential that supply chain issues and other shortages are going to make it difficult to increase the supply component of the supply-demand situation that will determine inflation levels.
Stocks made a half-hearted attempt at a bounce on Thursday but faltered late in the day and closed poorly. Breadth was positive at around 4,500 gainers to 3,600 decliners, new 12-month lows were well below recent levels, and there were some solid pockets of relative strength, but the bear market is now hitting big-caps and indexes while secondary stocks are trying to find some good support and turn up.
The action under the surface is encouraging, but we still have the same issue about how well smaller stocks can rally while the big-caps and indexes are struggling. For many months I wrote about how the indexes were covering up weakness under the surface. We now have the inverse situation, but the dynamic is different because of how much focus institutional Wall Street and the business media put on the indexes.
I'm watching the S&P 500 carefully to see if it can fall into a technical bear market and trigger some sort of psychological reaction. I like the action in many individual stocks and am slowly putting a little more capital to work.
