Wednesday Market Review: FOMC & The Bear Market

FOMC:

• The Fed raised interest rates 50 bps today.
• Powell will not consider a pivot until inflation is on track for the ~2% inflation rate he’s is looking for.

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Let’s assume:

• The Fed continues rate hikes over the next year
• Personal Savings rates continue to drop
• Wage Growth continues to decrease
• Credit Card debt continues to increase
• Unemployment rises because consumers are spending less

The direction these indicators swing (and how much they swing) will help gauge where asset prices could be.
We can also use the ERI https://www.breakingmetrics.com/economic-robustness-index/ to help us determine how bad economic conditions are for the average American.

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There are 2 ways the Fed controls inflation: (1) Supply, (2) Demand

• We know the Fed cannot control supply: supply chains globally are still weak (see China)
• But the Fed can control demand by making you poorer
  • This is why we hear Jerome Powell say things like the job market is too hot and he needs unemployment to go up

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If we assume economic conditions will worsen, then this is the only chart that matters:

From a technical perspective, we can identify 3 major areas of support for potential bottoms on the S&P 500 / $SPY.

1. Bottom Range No. 1
   • Assumes that macro-economic conditions improve in 2023 and the Fed slows rate increases to 25 bps or stop rate increases altogether for come periods
   • We can see a bottom forming at support levels from September and November 2020 around ~$320
2. Bottom Range No. 2
   • Historically, S&P prices have consolidated in this range in 2018 and 2019 before and after the December 2018 correction
   • If wages and unemployment don’t improve, we can easily see a correction between $280 to $300
3. Bottom Range No. 3
   • This range becomes more likely if macro-economic and geo-political conditions do not improve
     • This means regional conflicts (ie: Russia/Ukraine or China/South-East Asia)
     • Margin calls & final capitulation
     • Personal loans outpace wage growth (or we see negative wage growth)
   • Take note: Inflation went down in 2008 – but so did the entire economy. The Fed can reach its 2% inflation goal – but at what expense?
   • From a technical perspective, we can see a sloping support line from 2013 on a logarithmic scale
     • Price has touched this support line 5 times before
     • A capitulating event could easily test these levels again at around ~$255

Don’t forget: The 2008 Global Financial Crisis printed a lower-low than the 2000 Dot-Com crash.

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Let’s also consider a more optimistic perspective:

• If economic conditions improve but the Fed continues to raise rates slowly, we can expect prices to crab in a range between $300~$400 for the next year.
• Historically, bear markets have lasted years – the steeper the capitulation, the longer the recovery.
  • So we could crab for another year as macro conditions improve
• Inflation, personal savings, and supply will determine how low prices go and how long the bear market lasts