Breaking the Winning Streak

The S&P500 (SP500) witnessed a 0.40% downturn last week, marking only the second downwards slide in the past 16 weeks. This descent also put an end to a triumphant 5-week winning streak for the index.

Since late October 2023, the S&P500 had surged almost vertically. What sparked this meteoric rally was the Fed’s dovish pivot at the December FOMC meeting, abandoning the “higher-for-longer” policy and signaling a “normalization” shift. However, given recent economic data showing higher inflation and stronger growth, it seems likely that the Fed might need to postpone its normalization plans and even consider an interest rate hike. This anticipation suggests a looming deeper downturn for the S&P500.

Revising Projections: The Fed’s Dilemma

The FOMC’s December Summary of Economic Projections outlined a slowdown in GDP to 1.4%, a slight increase in unemployment to 4.1%, and a fall in core PCE to 2.4% for 2024, prompting the Fed to signal 3 interest rate cuts. However, recent better-than-expected economic data, particularly in the labor market and inflation, may compel the FOMC to revise their projections, signaling fewer cuts than previously expected for 2024.

Market Expectations vs. Reality

The market initially interpreted the Fed’s dovish pivot as a signal to avert a 2024 recession and the potential credit crunch in 2025 by pricing in a more aggressive easing. Although aggressive cuts may seem rational to avoid the 2025 maturity wall, the hope that inflation would collapse did not align with the data.

The Macro Context and Current Market Theme

Following the Fed’s shift in policy, financial conditions loosened considerably, with falling yields and a soaring stock market. However, after the Fed’s reinstatement of a “higher-for-little-longer” policy, the market began to price in the Fed’s projections, causing the 2Y and 10Y Treasury Notes to reflect tightening financial conditions. Despite the rise, the S&P500 experienced fluctuations influenced by the GenAI theme and specific tech stocks.

What Lies Ahead?

• Further tightening of financial conditions, marked by the 2Y yields pricing in 3 Fed cuts, signifies an intensifying selloff in the stock market, predicated on valuation multiples contraction.
• Anticipated revisions to the Fed’s projections could lead to deeper selloffs, impacting overpriced tech stocks the most.

Mounting Pressures on S&P500

The financial markets are like a rollercoaster right now – jittery and unpredictable. Recent shifts in the economic landscape are echoing through the S&P500, and investors are bracing for a bumpy ride ahead. The upcoming events are like a series of dots, and as they connect, they draw a picture of cautious treading and mounting pressures on the S&P500.

Impact on Retail Sales

The unexpected plunge in January’s retail sales is sending ripples into various other economic indicators. In particular, it might cast a shadow on initial unemployment claims, potentially forewarning a looming recession. If this domino effect unfolds, it could plunge the stock market into a downturn reminiscent of a bear hibernating through a tough winter.

Nvidia Earnings and the Tech “Bubble”

As if one pin wasn’t enough, the upcoming Nvidia earnings report on February 21st is being projected as another potential needle that could prick the big tech “bubble”. With the specter of this “bubble” hovering over the market, it’s as if investors are watching a balloon swell to its breaking point.

Implications and Strategy

The financial environment is cinching tighter, and the indications are that this trend is likely to persist as the market and the Federal Reserve grapple with the reality of inflation. This unfavorable scenario is a negative catalyst for the S&P500 in the near future, prompting a “Hold” rating for many market analysts.

Amidst this concern, certain factors present a silver lining – an immediate recession is not imminent, there’s no sign of a systematic credit crunch, and the Fed is not expected to push for interest rate hikes. These bright spots are preventing a “Sell” rating from being issued at this time.

Technically, as the resistance from the previous high and the peak of the rising channel loom ahead, the correction in the S&P500 is potentially underway, with the 50-day moving average emerging as its next bulwark at around 4800.

Long-Term Bearish Outlook

As the November elections draw near and the 2025 maturity wall looms on the horizon, the conditions for the stock market are projected to deteriorate further unless the Fed intervenes aggressively – a prospect that seems unlikely at this juncture. As a result, the longer-term outlook for the S&P500 is increasingly shrouded in bearish hues, signaling a storm on the distant horizon.

Insight from Key Charts

Specific charts are painting a stark picture of the market. For instance, the sticky Consumer Price Index (CPI) minus shelter costs has been on a relentless rise since November, signifying a sustained uptick in prices that may exacerbate market anxieties.

Another eyecatcher is the 2025 maturity wall, depicted graphically in a chart, looming ominously, much like a foreboding silhouette on the investment horizon.