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What I Care About This Week | 13 June 2022

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by Franklin J. Parker, CFA

The Summary

The Details & Chart of the Week

I admit, this market has gotten a bit nasty.

Investors have grown very concern about ever-increasing inflation, and the Fed’s response to this problem. Last week’s higher-than-expected inflation print pushed markets over the edge.

My view has been that, barring a recession, the S&P 500 would log a low around the 3900 level. Looking at a chart of the S&P 500 (and applying some basic technical analysis), we can see that there were buyers in the 3800 range and above since at least mid-2021. Today’s break below 3800 signals that those buyers have moved to a lower price. The next level that might offer some support is the mid-3500 range—a full 6% lower than current price. If markets get there, that would be a 26% total drawdown from the S&P 500’s peak—a very rare event outside of a recession. Also working against stocks in the short term is the downward channel that has very clearly formed since the start of the year.

In short, the short-term picture looks rough, with a new possible bottom getting logged somewhere around 3500 and sometime between July and October. Of course, these short-term swings are notoriously hard to predict, and a single news item can turn the whole thing around. The Fed’s meeting on Wednesday, for example, may offer an upside surprise to markets which have begun to price in a possibly overly pessimistic view of Fed actions.

The big question is: are we in a recession, and, if so, how long would it last? My view is that we are not. Employment is still very strong, consumer demand remains high, and credit is still flowing. If this is a recession (and it might be!), it would be a very strange one. Last quarter’s GDP posting, showing a contraction, might give investors some clue as to a potential cause. Government spending is down considerably from this time last year, and that could be enough to drag the economy into a technical recession, even if the fundamentals look decent.

If this is not a demand-induced recession (i.e. fewer people working and buying things), then I still see a run-up into the end of the year. But, as I have said many times before, flexibility is key in this environment. As we get new data, we must update our view and our portfolios.

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