November 7. 2023: The Fed may have paused its direct attack on the economy. The supply-side problems caused by the pandemic have cured themselves and only the money supply needed to be reduced. Selling off the Feds balance sheet would have done that and probably not have effected the economy as negatively. Moreover, long-term rates may not have needed to increase as much because inflation, one the main determinants of long rates, would have been less.
The Fed rate hike and attack phase pause is a positive. Another short-term positive is the only about 25% of stocks remain below their 200 day moving average which is broad-based and bullish. When only 25% of stocks are above their 200 day moving average bullish market breadth is very narrow and bareish. This is usually a good time to buy. But it could turn out to be a bear market rally that soon turns sour.
The reason why the market could turn is that most economic indicators are rather weak. If either the labor market or consumer confidence change for the negative, a recession is guaranteed. Because the Fed failed to attack inflation directly and, because as Mayur Thaker of Zacks Weekly Market Analyses, 6 November, 2023 states “. . . remains steadfast in keeping short end rates higher for longer, and as both S&P and Fitch Ratings downgraded US credit ratings, the 2yr-10yr UST spread has been rapidly steepening, primarily driven by a rising 10-year yield—often called a ‘bear steepener’. Moody’s recently warned of further credit rating cuts on the US if the government shuts down later next month.
. . . It remains possible that long rates actually increase due to the perception of increasing credit risk. Some 31% of all Treasury debt outstanding is set to mature in the coming 12 months, and with a large and burgeoning $2 trillion budget deficit—or 8% of GDP, highest in 60 years—that the US government will have to refinance at significantly higher rates partially due to the notable absence of buyers at the Federal Reserve and China this time around.”
Thaker continues, “. . . The effects of high nominal and real yields together for an extended period of time, including the possibility of even higher yields in the near future, will exert extraordinary pressure on economic decision-making at the margin and tilt us toward recession.” Which will be made worse after a long-period of the Fed weakening the economy. “. . . Although the Fed is clear they are okay with a mild to moderate recession so long as they achieve their objective of inflation sustainably around 2%,” I would argue that the mild recession may become much worse.
Thacker adds that, “. . . We can now confidently add higher bond yields due to rising credit risk to the list of market headwinds, which include negative real retail sales, declining weekly hours, manufacturing in recession, large negative revisions to jobs, leading economic indicators in recession, banks under duress, rising defaults, delinquencies and bankruptcies.”
I think the bottom line is a short-run stock rally. But throwing a monster anchor of debt on a weakened economy that appears now more like a tired swimmer will not produce the results anybody wants. Ultimately, this may very likely become a huge Fed or government failure that will be extremely difficult for the market economy to endure.
And, I’ll add one more caveat: Let’s be smart an not add a Trump disaster to the mix.
On that note, consider the following growth stocks as likely to produce positive results over the next 1 – 3 months: PBF, BHC, MTK, GWRE, OCUP, QRTEA, CXM, PODD, VITL, ASUR, VEOEY, ACDVF, FUTU, ACGL. For dividends and growth over the next 1 – 3 months: GPS, ISNPY, LPG, HRZN, NNGRY, UUGRY, AY, BBY. Over the last 3 months, which the stock market has been largely down, the 5 top ETFs with positive to zero gains and listed from high to low include: IEO, XLK, IGV, IYW, and IGPT. As always, good investing!
