September and October are seasonally weak, and many of us can recall major market meltdowns during the fall. But a major reason behind market weakness lately might simply be that the market is behaving rationally. Buyers were jumping back into stocks earlier this year after a rough 2022 as inflation was coming down, interest rates stalled, and the dollar fell. Since that time buyers have been frightened off and selling has accelerated after the last couple of Federal Reserve meeting press conferences. The markets may have finally realized the Fed is not bluffing about keeping interest rates stubbornly high into 2024 to fight inflation. The Fed is not supposed to care about the stock market, and with unemployment hovering around 3.8% they can afford to fight hard. The Fed is communicating a clear message that they will not back the Dow and will not back down from their inflation crusade. They have no reason to cut rates before inflation gets to around 2% for several months, unemployment spikes, or something breaks (like we saw with the Silicon Valley Bank implosion in March).
As conflicting reports emerge about where the economy is headed many investors have chosen to either stay on the sideline or make short term trades. This has kept the stock market in a tight trading range for several months. One of these days we will see a break-out as a clear direction takes hold. Some market pessimists are talking about a 1987 style meltdown as high interest rates cripple the economy or the Ukraine-Russia war turns into a US-Russia war. But prognosticators like this are a dime a dozen and are often said to have predicted fifteen of the last two recessions. On the bull side some are predicting the AI revolution to continue pushing stocks like Nvidia and Microsoft to eyewatering valuations as they transform the economy and the world. In reality, we will likely continue to see strength in companies making real leaps in the AI space but also continue to see a rotation into some forgotten sectors that are still churning out loads of cash, like oil and gas. In 2022 we saw record profits in the energy sector, and we are seeing another spike in commodities prices that should push profits even higher this year.
The market tends to surprise consensus opinion and current consensus is relatively negative. It wouldn’t surprise us to see markets continue showing weakness as the current correction accelerates, but it would surprise us if we didn’t see bounces along the way. Just don’t hold your breath waiting for the Fed to bail out the market. Also, keep in mind that nothing goes down in a straight line and there will always be buying and selling opportunities. Stocks are still stuck below that overhead supply level we discussed in previous commentaries, but they are also well above recent lows seen last October with an overall trend pointing higher. In short, we anticipate short-term weakness as Fed-induced high interest rates slow down the economy, but long-term strength as production continues to grow and jobs remain plentiful.