The S&P 500 is under pressure for the fifth straight day as economic concerns about a recession and labor-related inflation continue to build. For months the primary concern of the market was the Consumer Price Index, but stocks rallied on the belief that it had peaked and that the Fed was going to taper the level of its rate hikes in December.
The expected reduction of the rate hike at the Fed meeting next week to one-half percentage point from 75 basis points helped to build positive sentiment, but it was a short-term focus that overlooked clear indications from the Fed that hikes likely would last longer than expected and go higher than previously thought.
The main driver for more aggressive Fed rate hikes is the strong jobs market. Job openings remain at high levels, wages are still rising, and demand for labor remains strong. A big part of the problem is that the labor force is not growing, but the demand for labor still is.
Economists are growing increasingly concerned that a recession is unavoidable. There is no easy way to slow inflation related to employment without a significant impact on growth. The yield curve keeps inverting as recession fears grow stronger. Fear of a recession is driving up demand for 10-year bonds, which is causing the yield on those bonds to fall under the level of the 2-year bond. This is a 40-year high and is viewed as a sign that a recession is almost certain to occur.
According to Citi Global Wealth, "Markets have never bottomed before a recession has begun." We are still waiting to see if and when this recession will start, but the market obviously is pricing in the potential right now.
China stocks are under pressure here on Wednesday morning on weak trade data. Oil and other commodities are under pressure on concerns that a slow economy will impact demand. Apple (AAPL) is weak on more worries about iPhone 14 demand and supply.
We are in the teeth of a bear market, and there is no choice but to stay defensive and hold high levels of cash. There is no reason to rush to put capital to work right now.
We are oversold enough for a relief bounce, but there is no convenient news catalyst to shake things up. On Friday, we see the Producer Price Index (PPI) report, but there isn't much before then.
My plan is to sit tight with high levels of cash and remain patient. This is not the time to bargain hunt or to average into positions. The risk of further downside is very high.
