The 6/1 debt deal deadline appears to be weighing heavily on the stock market (SPY). Yet it’s nothing more than a side show and a distraction from what really matters. 40-year investing veteran Steve Reitmeister explains what investors need to focus on to stay ahead of the market in the weeks ahead. Get his market outlook, trading plan, and top picks in the new commentary below.
The debt ceiling is a sideshow. Not real theatre. And that’s not a real reason for stocks to move.
The sad reality is that we are still stuck in traffic not knowing if the traffic will be bullish or bearish from here. In the meantime, investors are ready to trade every little ripple in the water, no matter how insignificant.
What really matters is the next big wave. Will it be bullish or bearish?
Solving this mystery continues to be the key to future investment success…and so will be our focus today.
Market Commentary
Last week, the narrative was that stocks hit the bullish breaking point of 4,200 for the S&P 500 (SPY) on news that a debt ceiling deal was in the works.
Then on Tuesday, stocks fell just over 1% as debt talks drag on in typical DC fashion.
Let me tell you how it goes from here so there’s no mystery.
There will be a lot of political theater between now and the 6/1 deadline. This could include a temporary funding arrangement so that a longer term agreement can be worked out after the deadline.
But somehow, somehow, a deal will be made like every time in the past… and every time in the future. The shares will rise on this news. Maybe even break above 4,200 for a brief period.
Yet when the smoke clears, investors are still left with the same conundrum. It’s about whether a hawkish Fed determined to control inflation will create a recession and a deeper bear market…or will that catastrophe be averted, paving the way for a more bullish upside?
As you know from my previous comments, I view the bearish case as most likely because the Fed usually talks about creating a soft landing when raising rates…but fails 75% of the time because a recession has occurred.
This time around, they’re telling you up front to expect a mild recession when all is said and done. So, assuming the same margin of error from the Fed, a deeper recession is likely on the way. This will lead to a weaker earnings outlook and much lower stock prices. (Yes, below the 3,491 low set in October 2022).
This debate has been at the heart of the trading range scenario we have faced throughout the year, where the bulls make as much of an argument as the bears. Their main argument being that a recession is still not happening.
When the bulls or bears start to make a more compelling case, the market will move in that direction. This means that we are best served by looking for the clues that would tip the scales one way or the other.
On that front, there were some interesting notes from key Fed officials this week to consider. In the background, remember that investors are now predicting an 80% probability that they will freeze rates at this level. Some will think it’s an accommodating pivot and a reason to rally.
The Fed’s Neel Kashkari says…not so fast! Here are the key segments of CNBC’s review:
“Will we then start raising again in July? Potentially, and so that’s the most important thing for me is that we don’t take him off the table.”
“The markets seem very optimistic about the rate cut now. I think they believe inflation will go down, and then we can react to that. Hopefully they’re right,” he said. added. “But no one should be confused about our commitment to bringing inflation down to 2%.”
“This is the most uncertain period we have had in terms of understanding the underlying inflationary dynamics. So I have to let inflation guide me and I think we are letting inflation guide us. we needed to go north of 6%” on the federal funds rate, he said. “If banking strains start to bring inflation down for us, then maybe we’re getting closer to the end. I just don’t know right now.”
Then on Monday, St. Louis Fed President Bullard said he expected 2 more rate hikes needed to bring inflation down to 2%. To be fair, he also thinks the chances of a recession are overstated and not a necessary outcome of this process. (Again, let’s remember the outcome of the Fed’s 75% recession on rate hikes.)
Finally, a week ago, Fed Governor Bostic said he doesn’t expect a WELL rate cut until 2024.
All of these statements run counter to current street estimates that investors are expecting this to happen in September. I don’t know how many times investors can get this process wrong because Fed members have always been clear about their intention to keep rates higher for longer with express statements that there will be no lower rates until 2024.
Now here is the economic catalyst watch that I shared in my previous comment:
5/25 Unemployment Insurance Claims– This will not be strong enough on its own, as investors will seek collaboration in the 6/2 report on the government’s employment situation. However, if jobless claims start approaching 300,000 per week, this historically indicates that the jobless rate has been on the verge of rising for some time.
5/31 ADP Jobs, JOLT– 2 other employment reports which often serve as leading indicators of what lies ahead with the government’s monthly employment situation.
6/1 Manufacturing ISM, Unemployment Insurance Claims- there were a LOT of weak readings for the manufacturing ISM with little signal that a recession was at hand. However, it remains one of the key monthly reports to watch on the health of the economy.
6/2 Employment situation in the government- Job creations are expected to continue to fall to 180,000 this month. Note that population growth requires 150,000 job creations per month to maintain the level of the unemployment rate. Thus, any move under this mark could cause investors to predict even worse readings to come. Also, many eyes will be on the wage inflation component, as this persistent inflation has clearly embarrassed the Fed.
ISM services 6/5– Was in positive territory at 53.4 last month. But if that cracks below 50 into contraction territory, it would certainly increase the odds of a coming recession.
6/14 Fed Meeting- More and more investors expect to hold off on rising rates. But that’s quite different than pivoting to lower rates which they still claim is a 2024 event. So the Powell press conference following the rate hike decision will be closely watched for clues on that. who will follow.
In conclusion, I want to make sure that investors don’t get sucked into a rally after a debt deal. Let the smoke rise from this event to focus on the real debate of whether a recession is in the air in the months ahead. This will determine whether stocks are raging higher or lower.
The clues above will help you put the pieces together. However, if you’re having trouble figuring it all out, keep listening to my comments where I’ll stay up to date with the action.
What to do next?
Discover my balanced portfolio approach for uncertain times. The same approach that has largely beaten the S&P 500 in recent months.
This strategy has been developed based on over 40 years of investment experience in order to appreciate the unique nature of the current market environment.
Right now it is neither bullish nor bearish. She is rather confused and uncertain.
Yet, given the facts in our possession, we will most likely see the bear market come out of hibernation mauling stocks lower once again.
Fortunately, we can adopt strategies to not only survive this downturn…but even thrive. That’s because with 40 years of investment experience, this isn’t the first time I’ve been in the rodeo of the bear market.
If you’re curious for more and would like to see the handpicked trades in my portfolio, please click the link below to start getting on the safe side of the action:
Steve Reitmeister’s Trading Plan and Top Picks >
I wish you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return
SPY shares rose $0.26 (+0.06%) in after-hours trading on Tuesday. Year-to-date, SPY has gained 8.69%, versus a % rise in the benchmark S&P 500 over the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the company, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, plus links to his most recent articles and stock picks.
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