The Long-Term Bear Market Is Here

Stocks fell again today following yesterday’s 75 basis point rate hike. The Dow, S&P, and Nasdaq Composite all tumbled, driven lower by a hawkish post-FOMC speech. Treasury yields soared as the 2-year Treasury yield hit a high (4.739%) unseen since 2007.

Yesterday’s rate increase met expectations. Investors had priced in a 75 basis point hike prior to the 2 pm EST announcement.

What the market didn’t anticipate, however, was a “full hawk” moment from Fed Chairman Jerome Powell.

“We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” he said after the rate hike was announced.

Powell added that it was “premature” to talk about pausing hikes at this point, and that “we have a ways to go.”

Stocks temporarily rallied prior to Powell’s press conference on a Fed statement that accompanied the rate hike.

“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” read the statement, which investors initially interpreted as bullish.

Sentiment flipped sharply bearish as Powell said the “ultimate level of interest rates will be higher than previously expected.”

Many analysts believe yesterday’s losses could continue as investors adjust to Powell’s outlook.

“With Powell’s hawkish comments yesterday disappointing some and flipping the script on an initial rally, don’t be surprised to see more of the same volatility as investors digest the report and anticipate the Fed’s next steps,” explained Morgan Stanley’s Mike Loewengart.

UBS chief investment officer Mark Haefele even said yesterday that the odds of a year-end rally are lower than a bearish continuation.

“In our view, the risk-reward for markets over the next three to six months is unfavorable, and today’s Fed statement supports that view,” Haefele wrote.

Earnings season continued to disappoint today, too, after Qualcomm (NASDAQ: QCOM) and Roku (NASDAQ: ROKU) both provided poor quarterly results. QCOM shares tumbled 7.60% while ROKU opened almost 18% lower before recovering substantially.

Troubled fitness company Peloton (NASDAQ: PTON) reported a worse-than-expected quarterly loss as well. PTON shares plunged as much as 21% in premarket trading but rebounded fiercely through noon.

But overall, both ROKU and PTON are still down on the day (-5.30% and -2.90%, respectively). Collapsing guidance took its toll on Big Tech stocks last week.

Now, it’s the rest of the market’s turn to suffer. And a poor earnings season could not have come at a worse time with Powell sticking to his guns.

According to Citi strategists, an EPS slump should soon arrive as a result.

“We think the next global EPS recession is about to begin, the 8th in the past 50 years,” wrote Citi analyst Robert Buckland.

“Our models suggest the MSCI World index is already pricing in a 5-10% earnings contraction, well below the 5% increase predicted by the analyst consensus for 2023 […] We remain concerned that interest rate obsessed equity markets have yet to price in the true earnings impact of a full-blown economic slowdown.”

Sound familiar? It’s something we’ve discussed many times, the fact that the vast majority of money managers are too young to have investment experience in a pre-quantitative easing (QE) market.

Uber-low rates have masked a dysfunctional market for the last 22 years. It was just a matter of time until we had to “pay the piper.” The pandemic only made the eventual conclusion of QE even worse.

A global recession is likely already here, but the analyst consensus for 2023 is 5% growth? Really? Does that make any sense at all?

Maybe it does if you think that we’re going to get out of this mess without an economic implosion.

Sadly, though, we probably won’t. Especially not with the leaders we currently have.

The sooner that investors come to terms with this, the better. And sure, there are going to be short-term rallies on the way down that will make traders wish they’d never been bears at all.

But, as we’ve seen this year, every bear market rally has been a peak to sell, not something to jump on expecting additional gains. Dip-buyers have been burned time and time again.

The current economic trends – high inflation, tight labor, slumping earnings – are not going to change that pattern, meaning that stocks should continue lower no matter how many times analysts insist that Powell is “actually going to pivot this time” ahead of each coming FOMC meeting.


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