The bulls saved the market this week as the S&P 500 finished higher by 6.6%! Was that it? Was that the bottom? We don’t think so. Bear markets usually have wild rallies that suck investors back in. Don’t get me wrong. There are positives this week. First of all, hedge funds have really taken down risk, and secondly, corporate insiders are buying large amounts of stock. That’s good news. Anecdotally, we also heard of more layoffs this week. If the jobs market cools off, that will accomplish most of what the Fed is trying to do.
Here’s the real deal. The Federal Reserve needs to cool off inflation. They basically only have one tool. That is to tighten policy so the economy cools. Not very efficient, but getting the stock market down helps them accomplish their goals. So, the higher the stock market goes, the more the Fed has room to raise rates. If the stock market falls, it then takes pressure off the Fed and they are more likely to stop. Hence, a bear market rally only encourages the Fed to step on the brake. Not good for stock prices. Here’s the rub. Just make the situation more complex – it’s getting political now. President Biden is looking at a falling job market and a falling stock market. That is not good for the Democrats as the mid-term elections approach. Biden is going to meet with Powell in the Oval Office on Tuesday. You have to figure he is going to tell him to let the market up. Not sure what Powell’s response will be. Biden is stuck between a rock and hard place. Do nothing and inflation ravages the lower and middle class. Do something and the stock market falls and unemployment rises. We have told you for years that easy money policy is a drug that politicians may never want to see end.
The end of this bear market will come when we see more layoffs, so watch the job market. Hedge funds deleveraging means that a capitulation selloff may not come, so we must be prepared for that as well.
Remember last week when we told you:
“I’m ready to buy. I just hope the market makes it obvious.”
It’s doesn’t look like it’s going to be obvious – at least not yet.
June 17th is still a big date on the calendar. Bear markets go further and faster than you think. Middle of the range is 4300 on the S&P 500. We closed Friday at 4158.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.