It is widely believed that the Federal Reserve has the ability to adjust interest rates to prevent a “hard landing” in the economy. However, some economists argue that if the Fed continues to raise rates aggressively, it could have collateral damage on the economy.
While there are concerns that the Fed’s actions may lead to job losses, business bankruptcies, and a bear market correction, it’s important to remember Franklin Delano Roosevelt’s famous words: “The only thing to fear is fear itself.”
There are still some thought leaders who believe that an inverted yield curve, where short-term interest rates are higher than long-term ones, is a sign of an upcoming recession. However, the stock market does not necessarily agree with this view, as it continues to perform well. As long as consumer spending remains strong and people are employed, inflation is likely to persist.
However, if consumer spending slows down, particularly in areas like bars, restaurants, and entertainment, an actual recession could occur. In this scenario, there could be predictions of a weak Christmas season. The possibility of a recessionary narrative gaining momentum cannot be ignored.
Examining the Short-term Negative and Medium-term Positive Views of Stocks
Although there may be some bearish signals in the data, I still believe that the stock market will end the year on a positive note, potentially reaching 4800 or higher. However, it is worth noting that narratives play a significant role in driving stock performance. If bears can find data to support their negative narrative, it could impact the growth stocks that have been leading the market rally.
The Recent Statistics and Their Meaning
Last week’s data revealed slower job creation and persistent inflation. While the market focused on falling employment numbers, it’s important to remember that employment alone does not drive inflation. The demand for job opportunities plays a more significant role in wage growth. Despite progress in reducing job openings, there are still 8 million available jobs, which is substantial.
Although the market initially reacted positively to the employment data, the Nasdaq closed slightly lower, and the S&P 500 remained flat. It is clear that further progress in tackling inflation is needed to stabilize the market. In my opinion, if inflation reaches 3% and Q3 earnings remain positive, this would set the stage for a strong year-end rally.
What I Did This Week
Given my bearish sentiment, I have hedged my positions significantly this week. I have also adjusted my portfolio by trimming certain stocks that had performed well and booking profits. Additionally, I have invested in the VIX and inverse ETFs for the S&P 500 and Nasdaq-100. These hedges will protect my portfolio in case of a market downturn.
I have also taken a position in Olin Corp, a commodity chemical company that recently experienced a decline in its stock following the CEO’s resignation. There may be potential for strategic changes within the company, particularly in the ammunition business. While I am not involved in activist or private equity activities, purchasing stock in Olin Corp allows me to participate in any potential developments.
In summary, I remain cautiously bearish in the short term but optimistic about medium-term prospects. Cash management and having optionality are key principles to navigate unpredictable market conditions. With a significant cash position, I am prepared to take advantage of potential buying opportunities. Good luck to all investors.