The S&P 500 will be an official bear market if early indications hold. The S&P 500 ETF (SPY) hit a high of $479.98 on January 4, 2022, and a drop of 20% would put it at $383.63. Current indications are at $381.49.
The vast majority of the market has been struggling with a nasty bear market for quite a while now, but the S&P 500 is the measure that is used by institutional Wall Street and the business media. Once it drops 20% from its highs and stays there on a closing basis, then it will officially be deemed a bear market, and we should see quite a few headlines stating that fact.
The good news is that it advances what has been going on in this market for many months and brings things closer to capitulation and some sort of resolution. There is no way to know when and how that may occur, but with the S&P 500 in an official bear market, it is harder to argue that negativity is not discounted to some degree.
There is no question about what is driving this action. This is the worst confluence of economic events in decades. Inflation is at a 40-year high at 8.6%, the 2-Year Treasury is moving over 3% and is at its highest level since 2007, demand for mortgages is tanking, consumer sentiment is at an all-time low, and credit card debt soared 20% in April, average gas prices in the US are at a record $5, supply chains are still a mess, there is a shortage of labor in many places, cryptocurrencies are crashing, and we have the most hawkish Fed in a very long time.
While market participants are very aware of this long list of negatives, the problem is that there is no confidence in either monetary or fiscal policy, and there is a tremendous struggle to try to fully discount all the problems out there.
The Fed is in the difficult position of trying to raise rates fast enough to slow demand and stop inflation, but the danger of a recession lurks. Currently, the strong employment numbers give the Fed some cushion, but if unemployment starts to rise, then the dilemma the Fed faces becomes far worse.
The Fed holds its interest rate policy meeting this week and will announce its decision at 2 pm ET on Wednesday. Chances that they may raise rates as much as 0.75% have been rising after the hotter-than-expected CPI number on Friday.
My game plan is to simply stand aside and not try to play the bottom guessing game. When a sustained recovery eventually comes, there will be plenty of time to put cash to work.
The Japanese currency has broken through the resistance experienced in recent periods of weakness, leaving at its lowest levels against the U.S. dollar since 1998.