Has the Stock Market Finally Peaked?

Stocks traded slightly lower again this morning amid continued economic concerns. Back in April, we questioned the old adage of “sell in May and go away,” which refers to the market’s tendency to stall in the summer months. We observed (accurately) that these days, the market’s seasonal habits have been thrown completely out of whack due to the Covid pandemic.

Pre-pandemic, however, it was a useful strategy.

The period spanning May to October has seen the lowest average S&P returns of any six-month period going back to the early 1920s. That’s especially true following a rally of 20% or more from November to April.

But this year, equities rallied further from May through July, bouncing back from several hiccups en route to new all-time highs. Traders who exited the market in early May would’ve missed out on another 6% worth of S&P gains.

Now, though, following a far worse-than-expected July retail sales report, slowdown fears have reemerged.

“This is the summer grind,” noted Sanctuary Wealth chief investment officer Jeff Kilburg before commenting on the Fed’s July meeting minutes, set to be published at 2 p.m. EST this afternoon.

“The Fed minutes are always critical and scrutinized, and more importantly, they help illuminate the real sentiment inside of the Fed.”

Investors want to know what the Fed’s taper timeline looks like. A strong July jobs report had bulls worried that the Fed would taper its bond purchases sooner than expected. Wall Street agreed that an official “taper warning” would be coming on September 22nd following the September FOMC meeting as a result of the robust jobs data.

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Several Fed presidents have also suggested that taper talks need to start sooner rather than later. However, these remarks were made by non-voting Fed members. Voting members still insist that inflation is transitory, and Fed Chairman Jerome Powell won’t need to taper quantitative easing (QE) any time soon.

This confusion has made the FOMC meetings arguably the most important monthly event for the market. Powell has repeatedly said that there would be no tapering until “full employment” (an unemployment rate of 3.5%) was achieved.

However, that may not entirely be true. Inflation concerns might force his hand before the US hits 3.5% unemployment. That’s what makes today’s meeting minutes release somewhat important. Investors want clarity on the FOMC’s economic goals, and to see if their internal discussions differ from Powell’s post-meeting statements.

If investors find out that Powell’s been bending the truth, stocks could fall in response. It would add yet another bearish pressure to an increasingly fragile market.

“The stock market is way overdue for a correction. Covid cases continue to spike higher darkening economic reopenings, consumer data shockingly has collapsed recently […] Several stocks have stopped reacting positively to good earnings, inflation reports remain hot, and Federal Reserve taper talk is everywhere,” said Jim Paulsen, chief investment strategist at the Leuthold Group.

It’s a sobering take on the state of the market, but it’s an absolutely accurate one. We predicted back in June that consumer sentiment would crash once government stimulus ran out. That’s exactly what’s starting to happen now that Americans have spent their “stimmy checks.”

Another round of stimulus may be necessary to save not only the stock market from a post-Covid hangover but the entire US economy, too. Of course, that would only make the inflation problem worse.

But when has that stopped the government in the past? So long as Powell sticks with the transitory inflation narrative, Congress has the green light to dole out even more cash.

Which, at this point, might only delay the inevitable:

Another knock-down, drag-out fight with “stagflation” not all that different from what the US endured in the 1970s.

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