US indices & recession risk

All US stock markets fell officially into bear markets. Even public officials are worrying about recession. But, is it a foregone conclusion, is a market rebound feasible?

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The makings of a recession

Even the White House now is starting to sound less optimistic about the US economy, with presidential adviser Brian Deese refusing to rule out a recession in a recent CNN interview. As the Fed continues to pull liquidity out of the financial markets, underperformance in the stock market is not a surprise. The question now is simply how far can it go?

And that likely relies on how willing the Fed is to keep up the pressure to bring inflation under control. As long as the economy is doing well enough to ensure Fed tightening, then the stock market could be under pressure. But, if the economic outlook worsens enough, then the Fed might start backing off. Or, as it happened in 2018, directly reverse course. And then, even as the economy gets worse, the stock market could rebound.

Who cares?

From a monetary policy and even fiscal policy perspective, the stock market going down isn't an issue. Especially if the stock market rose precipitously based on the most accommodative policy ever, because a pullback would signify simply that some of the "froth" is coming out of the financial system. Even as the Fed cut rates, reverse repo holdings (the amount of "extra" money that is in the financial system) rose to a new record high.

Investors are staying on the side-lines, unwilling to commit to the market. With already one quarter of negative growth on the books, supply concerns due to China, and uncertainty about the geopolitical outlook, it seems investors are willing to bet on higher interest rates. For now. But, if Bostic turns out to be right about a pause in September - particularly if there is a second quarter of negative growth - the bad news for the economy could be good news for the stock market

SPX in bear market

It is not a question, SPX500 has been in bear market since February ’22. The question is will it last much longer?

Judging by the stochastic divergence a rally towards 4100 and even 4300 can be expected. From there, the 200-day average at 4460 will determine the outlook. But short-term price action is not indicative of progress.

There is a slight upside bias which is not looking too likely to reach the 4100 resistance as all daily bars off the low are ‘indecision’ bars. In fact, price keeps being rejected at the 4k handle. Unless it closed above it, a local low below 3810 to collect liquidity can be very well expected. By the looks of it, the divergence will still appear even then. This might be the ‘low’.

Source: Spreadex trading platform

Key takeaways

The stock market seems to be becoming increasingly dependent on the US’s economy, but if performance worsens enough to get the Fed to stop tightening, then the stock market could rebound.

Investors are staying on the side-lines as they see a chance of higher interest rates due to supply and geopolitical concerns. Their focus is likely to be on the second quarter as negative growth would increase the chances of an interest rate pause.