November 30 will be known as the day the market’s influence shifted from the Fed’s tightening cycle to economic recession.
It is pretty incredible that on the same day that private payroll hiring was 63,000 less than expected and the slowest pace of hiring since January of 2021 …
Plus, a day when the Chicago Purchasing Managers Index fell from 45.2 to 37.2 and the worst reading since 2008 …
That Jerome Powell said he felt confident the US could avoid recession …
The Fed’s credibility is officially gone …
Next year will be all about the severity of the recession and the Fed will take a back seat until a crisis forces them to make a complete shift back to quantitative easing …
Today, I’ll offer a few eye opening stats and what to expect in the day’s ahead and months ahead.
This upcoming recession is so important to understand because it will be a profits recession.
What I mean by that is the banks boost the earnings growth forecasts of companies they trade so they make more money holding their stock.
Nothing new there except that while the Fed is fighting inflation these companies are getting hit on all sides.
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Their costs are rising as they pay higher wages to attract skilled workers.
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While their revenues are decreasing as consumers have cut back on spending.
Check out the year-over-year Real Earnings Growth chart below … Nineteen months in a row of negative earnings growth. This is worse than any period during the financial crisis of 2008.
We will very likely see negative earnings growth next year and the market is not prepared for that type of downturn.
Jobs are another area of the economy where the market is not prepared for what’s coming.
The Fed relies on the non-farm payroll report for their jobs numbers … However, the more forward looking data comes from the household survey, which has shown very different results.
The Fed is concerned with two things inflation and unemployment and they have changed the calculations on both to strengthen their hand in manipulating the markets.
However, time is running out. It has done a masterful job at hoarding cash in the system to allow them to kick the can down the road … For example, the Fed’s reverse repo facility pays money market funds a higher interest rate than government Treasury Bills.
This has built up balances of $2 trillion that will now be drained as the Fed needs to issue more Treasury securities to cover a budget deficit that is nearing $2 trillion a year.
What’s the Trade?
Be patient, I believe the rally that was ignited yesterday may have some legs … We may hit 4200 on SPX before this rally is over.
At that level I will be setting up bearish strategies in the sectors most vulnerable to the profits recession including small cap cyclical stocks using the iShares Russell 2000 ETF (IWM).
Other sectors that will lead the bear market in the early part of next year will be SPDR consumer discretionary ETF (XLY) and last but not least is the iShares High Yield Corporate Bond ETF (HYG).
Bring It Home
The next leg of this bear market will be the capitulation stage when unemployment starts to rise and corporate profits fall off a cliff as consumer debt and higher costs handcuff households.
This is just following a normal cycle of deleveraging individuals, corporations and governments from all the debt that has built up.
In the short-term the market will trade based on technicals, which drive trading into the end of the year.
On the brightside we will not have to care so much about every word that comes out of the Fed speakers mouths … Now the economic data will drive the markets … Until next time …
Live and Trade With Passion My Friend,
Griff