On Wednesday, the market suffered its worst performance of 2023. There was very broad and significant selling and no signs of support or dip buying.
The catalyst for the abrupt reversal was worse-than-expected PPI and retail sales reports. Initially, the market reacted positively to this data as it is anti-inflationary, but after a short period of reflection, concerns started to build that these reports point toward a recession and may be an indication of substantial economic slowing.
Market participants have been obsessed with peak inflation for some time. Fed speakers continue to point out that the battle against inflation is far from over, but the market has already priced in the near certainty of a 0.25 hike at the next Fed meeting on February 1. It is still expected that two more rate hikes will follow, but the Fed is slowly backing off.
The problem is that the Fed is backing off because its policies are showing signs of working, which means the economy is slowing. There is a lag effect to all these substantial rate increases that are starting to be felt now. The slowing in PPI and retail sales clearly show that the economy is weakening, but how much further will it go?
The answer will emerge in the next several weeks as fourth-quarter earnings reports are released, and managements discuss forward guidance. So far, earnings have been generally poor, with nearly half of all reporting companies missing estimates. The most notable miss is probably Goldman Sachs (GS) , the second largest component of the Dow Jones Industrial Average, which has helped to drag it down after its recent relative strength.
The meat of earnings season will occur over the next two weeks and there is an increased risk of downside after the recent run-up and an increase in bullishness due to hope caused by the breadth thrust.
Technically the downside move on Wednesday creates the potential for the failure of another bear market bounce. A big part of the misery of bear markets is the crushing of the hope that starts to build on each rally attempt.
We have a weak opening Thursday morning, but the weekly unemployment numbers may cause some market reaction. The problem for the market now is that it isn't clear whether weak economic news is good or bad.
