The November CPI release and December Fed meeting occurred last week. The inflation data was better than expected, but the Fed was as hawkish as it could be. So the market sold off. During the post-meeting conference, the Fed Chair specifically mentioned the sticky wage inflation due to shortage of hourly wage workers. The Fed admitted that they are not able to create new workers, the unusual tight immigration policy in the last few years created a hourly wage workers shortage. The Fed can’t force Congress to change immigration policies. All they can do is to influence the economy through monetary polices.
During the pandemic, quite a lot of workers retired sooner than originally planned. They could afford early retirement because the stock market and housing market were rich during the pandemic. Currently, the US labor market is short of 3.5 million hourly wage workers due to early retirement. The destruction of wealth effects (stock market and housing) may force those retired early to return to workforce, at least that is what the Fed is hoping for. The Fed admitted that they don’t know whether recession is near or far. They are only focused on inflation–price stability right now, so they are willing to do whatever to keep the financial conditions tight. But, they can’t keep it tight forever, just like they couldn’t keep the easy money policy forever either. Inflation forced the Fed to abandon the decade-long easy money policy in 2022.
2024 is a presidential election year. The Fed will have to pause and pivot in 2023 so the economy and stock market will do well in 2024. Remember it takes time for the Fed policy to filter through the system.
The White House released a lot of oil from the strategic reserve a few months leading up to the midterm election so the gas price was not a pain point for voters at the election booths. The White House definitely doesn’t want to see a crashing stock market in 2024. Don’t underestimate the politicians’ will to retain power.
Below is the S&P 500 daily chart.
With the selloff in the last few days, the S&P 500 index is still contained in the uptrend channel. The lower channel has provided support during the heavy volume options expiration trading last Friday.
There are only 9 trading days left in 2022. It is entirely possible that the S&P 500 rallies for 5-6% to reach 4000 by year-end. It is 9 weeks into the current weekly cycle. It is still within the timing band for the weekly cycle to sustain another 2 weeks for this 5-6% rally. We are not calling for it to make a new high, but just sort of range bound trading.
The main reasons we are calling for this 5-6%:
1. The extreme negative sentiment
2. The bad news are out in the open. The Fed is determined to knock off any sustained rally.
3. The seasonality. Institutions may work together to do some window dressing.
4. There are $4 trillion cash in the money market. So investors are flush with money.
As we blogged before, we don’t see any fundamental issues in the stock market. We don’t anticipate the S&P 500 selloff to reach the scale like what happened during the 2008 financial crisis. The mid October low could well be the price low in the 4-year cycle. We just don’t know that yet. The 1Q 2023 low definitely is a great buying opportunity.