The bulls saved the market this week as the S&P 500 ended up 6.6%! That was it ? Was it the bottom? We do not think so. Bear markets usually have wild rallies that bring investors back. don’t understand me Wrong. There are positives this week. First, hedge funds have really reduced risk, and second, corporate insiders are buying large amounts of stocks. It’s good news. Anecdotally, we also heard of other layoffs this week. If the labor market cools, that will accomplish most of what the Fed is trying to do.
Here’s the real deal. The Federal Reserve must calm inflation. Basically, they only have one tool. It is to tighten policy so that the economy cools down. Not very effective, but driving down the stock market helps them achieve their goals. Thus, the higher the stock market rises, the more room the Fed has to raise its rates. If the stock market falls, then that takes the pressure off the Fed and it’s more likely to shut down. Therefore, a bearish rally only encourages the Fed to put the brakes on. Not good for stock prices. Here’s the catch. Just make the situation more complex – it’s getting political now. President Biden eyes a shrinking job market and a falling stock market. This is not good for Democrats as the midterm elections approach. Biden will meet Powell in the Oval Office on Tuesday. You have to understand that he is going to tell him to let the market go up. I don’t know what Powell’s answer will be. Biden is stuck between a rock and a hard place. Do nothing and inflation ravages the lower and middle classes. Do something and the stock market goes down and unemployment goes up. We’ve been telling you for years that easy money politics is a drug that politicians may never want to see go.
The end of this bear market will come when we see more layoffs, so watch the labor market. Hedge fund deleveraging means a sell-off may not happen, so we need to be prepared for that as well.
Remember last week when we told you:
“I am ready to buy. I just hope the market will make it obvious.
It doesn’t seem obvious, at least not yet.
June 17e is always a big date on the calendar. Bear markets go further and faster than you think. The middle of the range is 4300 on the S&P 500. We closed Friday at 4158.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.