A week ago, on Tuesday, December 13, investors celebrated a Consumer Price Index (CPI) number that showed inflation might be cooling faster than expected. Maybe the Fed would ease up on the rate hikes, and maybe Americans would be spared from recession and spiking unemployment…
Optimistic traders sent the S&P 500 soaring – up over 100 points in the first 30 minutes of trading to challenge recent highs at 4,100. And that was it. That was the bull's crescendo of confidence.
The S&P 500 has now dropped 7.5% in 5 days, back to levels from November 8. A six-week rally unwound in just five days. Risk happens fast, and sentiment can turn on a dime.
Fear of an imminent recession is now the lead headline. Morgan Stanley and Goldman Sachs were out with bearish forecasts yesterday – they both agree that recession is likely and the S&P 500 is on its way to 3,800, another 20% lower from current levels.
Well, isn’t that convenient…
I’ve written before about windows of opportunity in the stock market before. Windows of opportunity open when investor sentiment is moving in a specific direction. All it takes is a little nudging from influential investment banks, maybe a well-timed forecast printed in the Wall Street Journal to set off a stampede.
These days, it’s pretty easy to quantify investor sentiment. There are firms that do nothing but track keyword searches on Google and keyword mentions on Twitter, and that info then informs trading, promotional and editorial strategies. If you see the words “electric vehicles” popping up frequently in Google searches, well, maybe an investment article about electric vehicles will get some play and maybe even go viral…
A cynic might call this a form of market manipulation. A realist might prefer to say it’s just good marketing. My point is that if the world's Morgan Stanley and Goldman Sachs see a window of opportunity to push stock prices around, they will do it.
So, about that recession. The short answer is that nobody knows whether the U.S. economy will contract next year. The inverted yield curve for bonds (which means short-term bonds have higher yields than long-term bonds) says the recession is coming. The jobs market says the Fed will have to work much harder to push the unemployment rate higher and tip the economy into recession.
I don’t have a strong opinion either way. But I do know that the recession story will remain out there. And even if it gets pushed to the back burner, it can get put back on the front burner pretty quickly.
In the meantime, investors are still on the lookout for the elusive Santa Claus rally. Now that the S&P 500 is putting together a little rally keep an eye out for some bullish headlines. It shouldn’t be too hard for Wall Street to open a window of opportunity for a little upside move here.
That’s your “Morning in the Markets” for today, take care, and I’ll talk to you tomorrow.
The Profit Sector