Fade the Friday Rally

The 24/7 investment media like CNBC needs to keep things interesting to keep you watching all in the name of selling more ads. Their favorite trick is to show the great importance of that day’s news and how it affected the S&P 500 (SPY).

That means that on Thursday they were telling people why things are so terrible and why stocks are down. And then Friday they put on a broad smile talking about how Fed whispers of potentially less stringent rate hikes led to a monster rally.

Interesting for sure...just not profitable advice.

Let’s talk about what is really happening...and why...and why stocks are still in a long term bear market battle with lower lows on the way.

Market Commentary

Stocks were floating around this past week until another shot was fired by the Fed to dampen the mood. I am talking about the mid-day Thursday comments from Philadelphia Fed President, Patrick Harker. Here the key excerpt from the CNBC article on the topic:

“Philadelphia Federal Reserve President Patrick Harker on Thursday said higher interest rates have done little to keep inflation in check, so more increases will be needed.

“We are going to keep raising rates for a while,” the central bank official said in remarks for a speech in New Jersey. “Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4% by the end of the year.”

The latter comment was in reference to the fed funds rate, which currently is targeted in a range between 3%-3.75%.

“Sometime next year, we are going to stop hiking rates. At that point, I think we should hold at a restrictive rate for a while to let monetary policy do its work,” he said. “It will take a while for the higher cost of capital to work its way through the economy. After that, if we have to, we can tighten further, based on the data.”

Pretty much from that moment stocks reversed out of early gains to end firmly lower. The reason should be obvious. That we may not currently see the full measure of pain in the economy because the Fed’s work is FAR from over.

So if their efforts to date have not resulted in moderating inflation, then it will take much higher rates and likely much more damage to the economy to get the job done. And those hoping for a soft landing should start abandoning that flawed assumption.

I say that even as Friday there was a bounce for the “supposed” reason that some investors heard some talk at the Fed that would point to fewer rate hikes and less pain to the economy. Here is a CNBC article on that topic:

Stocks rally Friday as traders hope Fed rate hikes will slow down, Dow up 500 points

Sorry folks. I don’t give that much merit.

Remember that the Fed will always have internal debates on the pros and cons of any policy decision. The consensus outcome is what you see issued to the public followed by a speaking tour of Fed officials to give those comments additional weight and color.

Let there be NO DOUBT that they are currently on course with what was shared by Powell at Jackson Hole. That being a long term battle with inflation. Do NOT expect any rate cuts through the end of 2023. And do expect it to create economic pain (slowing of growth and dampening of the labor market).

Now let’s layer on top of this somber note the growing legion of corporate executives that are sounding the alarm on a looming recession. Jeff Bezos of Amazon is the one listed first in this article, but as you scroll down in the article you will see many more pounding the table followed by Elon Musk echoing that sentiment on Friday.

The most interesting part is that on this list are many Wall Street executives. The great curiosity is that crowd rarely says recession or bear market. That’s because when they do that, then more clients go from investments in stocks to cash where they make little to no fees.

Instead these folks typically speak in riddles about volatility or potential difficulties on the horizon. So historically you would have to read through the lines to get down to their real meaning.

The point being if Wall Street execs are straight up telling you that a recession is on the way...then best you believe it to be true and invest accordingly. (Which we are...more on that below).

On the economic front weakness found in the Empire State Manufacturing report on Monday was confirmed on Thursday be an even worse showing for the Philly Fed Manufacturing Index. The way forward does not look much better as the New Orders component remains weak at -15.9.

Remember that manufacturing is often a leading indicator for the economy as a whole. So the weakness here will likely spread to the services. Some of that was already on display last week from the Retail Sales report which shows that overall spending is ONLY higher because of inflation. If you remove inflation you see net spending is lower. This is likely a big part of the reason that Jeff Bezos is sounding the recession alarm.

Bull markets are long term trends that typically last 5-6 years. Once on track...it is hard to knock off its axis.

Bear markets are more like 12-18 month affairs. Not as long, but also hard to knock off its trajectory once the ball is rolling. And indeed it is rolling. And will keep rolling until the Fed has hit the brakes hard enough to throttle the economy and put an end to inflation.

Please remember the battle cry of “Don’t Fight the Fed!”

In the Fed’s own words, this is a long term battle with no signs of lower rates til 2024. This is why so many corporate executives are preparing for recession. And this is why so many investment experts, including yours truly, are beating the bearish drum.

So yes, there will be bear market rallies here and there. Some quite impressive as we saw with the 18% gain from mid June til mid August when investors regained their senses. However, the long term picture points to lower lows on the way and you would be wise to get your portfolio in tune with that reality.

What To Do Next?

Discover my special portfolio with 9 simple trades to help you generate gains as the market descends further into bear market territory.

This plan has been working wonders since it went into place mid August generating a robust gain for investors as the S&P 500 (SPY) tanked.

If you have been successful navigating the investment waters in 2022, then please feel free to ignore.

However, if the bearish argument shared above does make you curious as to what happens next...then do consider getting my updated “Bear Market Game Plan” that includes specifics on the 9 unique positions in my timely and profitable portfolio.

Click Here to Learn More >

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return

SPY shares were trading at $374.66 per share on Friday afternoon, up $9.25 (+2.53%). Year-to-date, SPY has declined -20.20%, versus a % rise in the benchmark S&P 500 index during the same period.

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.

More...