The character of the market action shifted on Monday as economic concerns evolved.
For much of the year, the primary focus of the market has been on inflation and how it would drive the Fed to raise interest rates aggressively. Consumer-related inflation has been slowing, and the market celebrated that the Fed at its meeting next week is likely to reduce its next interest rate increase to one-half percentage point from a string of 75-basis-point hikes at previous meetings.
While pricing issues related to things such as used cars, energy and housing are looking better, the Fed is sounding the alarm about the inflationary pressures created by strong employment. The job market remains robust, and that was reflected on Monday when the purchasing manager index related to services came in well above expectations.
The labor market is a particularly thorny issue for the Fed. The number of job openings remains very high, but there are not enough people to fill those jobs, and the number of people joining the labor force is declining.
The Fed is going to try to slow down the demand for labor by raising interest rates, but it is more of a supply issue. The Fed won't increase the labor supply, but it can cause great damage to the economy by killing the demand for labor.
That is the issue that is coming to the forefront, and concerns are growing that Fed policies are going to hurt the economy and will not do much to fix the shortage of labor. There are more and more forecasts of a recession next year, and high-profile analysts such as Mike Wilson of Morgan Stanley say to sell now.
Bulls still hope the Fed's expected reduction in the size of the rate increase next week combined with seasonality and poor positioning will keep a positive trend going, but technical overhead is tough and the economic narrative is turning gloomy once again.
Monday was an ugly day, and we will see if there is dip in buying interest on Tuesday, but we don't have any great positive catalysts right now and there will be worries about loading up more long exposure as we head into the release of the November Producer Price Index (PPI) on Friday and the Consumer Price Index (CPI) and the Fed decision next week.
It is time for increased caution and more selective stock picking.