A stronger-than-expected IHS Markit U.S. Services PMI report appeared to show a sizable increase in business activity in the U.S. service sector, and the news triggered an ugly selloff. That put the bears back in charge of the market action. Small caps as see in the Russell 2000 fund (IWM) were stung for a loss of nearly 3%, and banks as seen in the bank fund (XLF) took a hit of 2.6%. Breadth was very poor, with 1,350 gainers to around 6,900 decliners
The market has been in an upbeat mood recently as it anticipates a declaration of Fed rate hikes. The bulls celebrated last week on comments by Fed Chair Jerome Powell, but there really was nothing new in his comments, and then the strong data Monday was a rude reminder that the battle against inflation is far from over.
Most of the positive action in recent months was a function of a short-term view that inflation is starting to come down. It has slowed enough for the Fed to adjust to a slower and more methodical approach but what the bulls have overlooked are the longer-term issues. There were comments from the Fed's favorite source at the Wall Street Journal that the ultimate level of rates may be even higher than currently anticipated due to strength in the jobs market.
Unfortunately, the market does not have any immediate data coming this week to give the bulls new ammunition. We have to wait until next week when consumer price index is reported, and the Fed announces its next rate hike. The problem is that the focus is now primarily on employment, and the data today did nothing to indicate that there is softness there.
The bulls have been hoping for some positive seasonality, but that may be simple and easy for a market that is still struggling with some tremendous economic uncertainty. It is still a bear market, and it is acting like one.
Have a good evening. I'll see you tomorrow.