The better question is what hasn’t happened! Just a few short weeks ago, the prevailing view was the Fed was way behind the curve. Powell needed to raise rates substantially to stamp out raging inflation the likes of which has not been seen in 40 years. Some even calling for a mid-meeting 100 basis point hike to shock the economy, thereby driving a stake in the heart of the proverbial “economic vampire” that is inflation.
Nevertheless, it appears the Fed’s goal of demand destruction may already be significantly underway. Fed Chair Powell seems to be getting exactly what he wants. Here’s why.
Inflation is moderating, demand is weakening, consumer sentiment is falling (which will continue to hit demand), and the S&P 500 (NYSEARCA:SPY) and Nasdaq (QQQ) are down substantially, yet appear to be stabilizing, for now. What’s more, the credit markets appear calm enough with the 10-year trading below 3%.
What’s really interesting is several of the most hawkish market participants, who were calling for the Fed to raise rates at the fastest pace in 40 years, are now saying the Fed may need to hit the brakes soon.
What’s more, with the S&P 500 and Nasdaq posting unprecedented losses over the past few months, we have been blessed with a nice bounce over the past week. In the following sections, we do our best to determine if this is just another bear market bounce or the bottom is in. We will also lay out the signs demand destruction may be well under way. Let’s get started!
The S&P 500 and Nasdaq have been under severe pressure for the last several weeks. The average stock down 30% with others hitting their all-time lows.
S&P 500 6-Month Chart
The S&P 500 has declined for nine weeks in a row. A streak of losses not seen in the index for 99 years. When selloffs of this magnitude take place, a phenomenon referred to as the “wealth effect” is basically taken off the table. When stocks are going up and people feel good about their financial position, they tend to spend more on discretionary items. Yet, when they see their hard-earned money begin to vanish before their very eyes, they tend to tighten their belts. This has a direct effect on demand for goods and services. The Nasdaq is down as well. What’s more, it has taken a much deeper dive than the S&P 500.
Nasdaq 6-Month Chart
Many of the stocks in the Nasdaq are down well over 50% with some seeing 75% drops akin to what we saw in the dotcom bubble of 2000. Nevertheless, both the S&P 500 and Nasdaq are up this week based on indications that demand destruction is underway and inflation moderating.
S&P 500 1-Week Chart
Nasdaq 1-Week Chart
The Fed’s preferred inflation gauge, the core personal consumption expenditures price index, or CPE, rose 4.9% year-over-year, came in line with estimates, and actually has decelerated since March. This may be due in large part to several sectors showing signs of weakness at present. Let’s review.
Demand destruction ahead
Housing market weakens
There have been a plethora of signs the housing market is weakening. Almost one in five (19.1%) home sellers have lowered their price over the past month, suggesting homebuyers are starting to reject historically high prices. Moreover, pending home sales fell 5.4% year over year as well. Further, new listings of homes for sale were down 0.9% from a year ago. Moreover, I can tell you from my own experience as a licensed Texas Realtor rates hitting 5% have priced many out of the market, while others have put the brakes on buying altogether. The red-hot used car market seems to have cooled as well.
Used car prices are down
Cox Automotive recently stated its Manheim Used Vehicle Value Index, which tracks prices of used vehicles sold at its US wholesale auctions, declined 1% month over month. What’s more, wholesale vehicle prices sunk 6.4% since the record high set in January, which may indicate the worst is behind us. The most glaring example of demand destruction emanates from the retail sector. Retailers write large have been hammered as weak earnings and guidance were reported across the board.
Retail earnings implosions abound
There were multiple massive implosions in retail stocks throughout the sector. Nearly all retailers missed estimates and lower guidance. It was especially brutal for a multitude of mall stocks, all suffering big losses to include Ross Stores (ROST) down 22%, Boot Barn (BOOT) off 18%, Shoe Carnival (SCVL) and Abercrombie & Fitch (ANF) each losing 14 %, Chico’s FAS (CHS) and Burlington Stores (BURL), both down 13%, and Cato Corporation (CATO) and Urban Outfitters (URBN), down 12% each.
The declines were not limited to mall stocks alone. Specialty retailers and discounters were hit hard as well led by Bath & Body Works (BBWI) down 24%, Five Below (FIVE) off by 19%, Conn’s (CONN) lower 18%, Best Buy (BBY) down 16%, and Williams-Sonoma (WSM) off by 14%. Discounters also were hammered during the week with Dollar Tree (DLTR) lower by 20%, Dollar General (DG) down 19%, and Big Lots (BIG) off by 18%.
Nevertheless, ground zero for the retail collapse was Target (TGT) which imploded 29% following its earnings and guidance bombshell and warning of a “rapid shift” in consumer demand. The retail giant’s massive nosedive coupled with the devastation across all types of retailers set off a rerating of the retail sector in total.
These across-the-board losses are most likely related high inflation eating in to main street’s wallets. Yet, there are inklings that even the persistent high employment rate may be beginning to crack. Here’s why.
Employment showing first signs of weakness
The heart of the storm regarding weakness in employment is the tech sector, which boomed during the pandemic, yet is now showing signs of contraction.
Meta (FB) recently announced it’s pausing hiring and scaling down some recruitment plans. Furthermore, Amazon’s (AMZN) CFO told analysts on the company’s earnings call that its warehouses have become “overstaffed,” following a large hiring spree during widespread lockdowns that drove consumers more and more to online shopping. It’s not just the biggest tech firms either. Below is a screenshot from a CNBC segment detailing all the companies currently mentioning they are freezing or reducing their hiring plans.
Uber’s (UBER) CEO told employees in a message obtained by CNBC that the company would “treat hiring as a privilege and be deliberate about when and where we add headcount,” adding, “We will be even more hardcore about costs across the board. ”
The fact of the matter is all these developments have been underway for quite some time. Furthermore, the CPE numbers out today indicate we may be at an inflection point when it comes to inflation. So, let’s tie a bow on this piece and wrap it up.
Based on strong signals of demand destruction exemplified by the weakness in the housing, used cars, and retail markets coupled with the first inklings the high level of employment and rate of inflation may both be moderating, I posit there’s a chance we may have put in a bottom this week.
On the other hand, the Fed still has to unwind a $9 trillion balance sheet and plans on raising rates by 50 basis points at each of the next two meetings. Plus, there is no guarantee the Fed will be able to manage a soft landing or that we won’t eventually fall into a recession of some magnitude. What’s more, we haven’t seen the most compelled signal the bottom is in, the capitulatory whoosh downward. The proverbial “get me out now” nosedive is characterized by a 10 to 1 decline versus advance ratio coupled with the VIX volatility index soaring above 40. Until we see this, I’m on the fence. Another issue I have is, even though it appears demand is being destroyed, it’s a supply issue with regard to the three biggies for main street – rent, food and gas.
Main street woes
I have several friends living month to month, as a majority of Americans do, and they are having to make hard choices with their rent, food, and fuel costs shooting through the roof. This leads me to believe a short and shallow recession at the very least may be on the table.
Due to the potential risk of a recession, I’m slowly layering in over time to positions in my SWAN retirement income portfolio such as AT&T (T), Verizon (VZ), Ford (F), Bank of America (BAC), and Iron Mountain (IRM). I also bought partial positions in beaten-down speculative stocks with solid growth stories such as Tesla (TSLA) and Roblox (RBLX). I have Palantir (PLTR) on my watchlist. The message is, use weakness as an opportunity to buy assets you believe are on sale, rather than selling out at the bottom.
There’s a fine art to investing during highly volatile markets such as these. It entails layering into new positions over time to reduce risk. You will want to have plenty of dry powder if the stock you’re interested in continues lower.
As my incredible Uncle Dr. Tony Clark, a submarine commander, scientist, and spook, whose exploits were documented in the book “Blind Man’s Bluff,” and some say was the genesis of the Jack Ryan character in, “The Hunt for Red October ,” said, “In the face of the storm you must have fortitude and faith.”
For me, this translates into having courage in your convictions when initiating a position. If you don’t truly believe in what you are investing in, you will inevitably sell out during times or market hardness just when you should be layering in. This is why I always do my own due diligence and only put my hard-earned money to work in companies I believe in. Here’s a picture in homage to my Uncle Dr. Tony Clark on this Memorial weekend when he was on a mission to the North Pole.
Those are my thoughts on the matter, I look forward to reading yours.
Your Input Is Required!
The true value of my articles is provided by the prescient remarks from Seeking Alpha members in the comments section below. Do you think this is a bear market bounce or a buyable bottom? Why or why not? Thank you in advance for your participation.