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Executive Summary

After the stock market was down in April, it rose over the last two weeks. The question now is whether the bulls or bears take control of the market in the short term. Last week Fed Chairman Jerome Powell fueled the stock market stating the “economy was strong,” as well as a taking the dovish stance of no rate increases this year. However, the first graph below shows leading economic indicators 13.1% below their peak (and shows time to recession from peaks). The second graph shows inflation (CPI) has recently turned higher. With first quarter GDP weaker, leading indicators flashing recession and inflation turning higher, will speculators or bears prevail?

Please continue to The Details for more of my analysis.

“Pay no attention to the man behind the curtain.”
–Noel Langley, The Wizard of Oz Screenplay

The Details

After three big down weeks in the S&P 500, the stock market rose over the past two weeks, recouping some of the downturn. Investors are now attempting to determine whether the decline returns, or if markets revert back to the prior bear market rally. The bear market rally was extremely strong and was based upon irrational beliefs that AI (artificial intelligence) could solve all problems, similar to the movement in the 1990’s. The rally (improperly labeled a return to a bull market, in my opinion), also gained momentum earlier in the year when the markets interpreted Fed Chairman Jerome Powell’s dovish comments as meaning the year would consist of many interest rate cuts. However, with the resurgence of inflation present in the recent economic data, the hopes for up to six rate cuts were dashed. This realization sparked the three-week return to the bear market which began in January 2022.

During the last press conference by Chairman Powell, he glossed over the weakening economy which shows up in many data points including the real GDP reading for the first quarter of this year. Despite the plethora of data showing the economy is either in or about to be in a recession, Chair Powell stated that “the economy was strong.” He also ruled out any interest rate hikes for this year, despite many pundits speculating on the need for higher rates to stop inflation from rising. The overall dovish slant to the entire press conference, ignoring economic reality, sparked a massive rally in stocks. Were his comments spurred by fears of a market crash or political blowback?

The following comments and graph are from Advisor Perspectives. The graph illustrates the drop in the leading economic indicators from their recent peak, and the number of months until the next recession.

“For a better understanding of the relationship between the LEI and recessions, the next chart shows the percentage off the previous peak for the index. We are currently 13.1% off the 2021 peak. The chart also calls out the number of months between the previous peak and official recessions. On average, there is usually 10.6 months between a peak and a recession. We are currently 27 months off from the 2021 peak.”

The chart below clearly shows the economy is in recession territory.

The Consumer Price Index (CPI), as shown in the graph below, has come off of its peak, but appears to have recently plateaued and turned back upwards. The current level of 3.5% compared to last year remains far above the Fed’s ridiculous target of 2%. Why the Fed has targeted 2% inflation is beyond explanation. At 2% annual inflation, this silent tax will cut the value of your money in half over 35 years. The Fed thinks this is acceptable, but that is a topic for another newsletter.

So, despite first quarter real GDP growth dropping to 1.6%, the LEI clearly flashing recession warnings and inflation plateauing and possibly on the rise again, Chairman Powell signaled “all clear” to the markets. Investors will now determine whether to see through the bluster, or if they return to a speculative state based upon “hope.” Over the long run “hope” is not a good investment strategy.

This week will be telling as to whether speculators have regained control of stock prices or if sanity begins to return, continuing the bear market to bring stock prices back to reasonable valuation levels, based upon corporate revenues and earnings.

The S&P 500 Index closed at 5,128, up 0.5% for the week. The yield on the 10-year Treasury 

Note fell to 4.50%. Oil prices decreased to $78 per barrel, and the national average price of gasoline according to AAA fell to $3.65 per gallon.


© 2023. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.

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