Economy and the stock market brace for “Hard Landing”

Nothing seems to be going right for the market. S&P 500 broke down below 3900 and now seems to be headed towards June lows. The market saw steep declines last week with S&P 500 losing 4.7% in the week, the Dow Jones Industrial Average fell 4.1%, and the Nasdaq Composite tumbled 5.5%. This is how Year to Date YTD  performances look like:

• S&P 500 is down 19.25%,
• Dow Jones is down 15.75% whereas
• NASDAQ is down 28%

Here’s why things went wrong:

The Inflation is now stubborn: Headline inflation came in at 8.3%, falling short of the expected 8.1%. It also inched up 0.1% month on month compared to expectations of a 0.1% decline. If that’s not bad, the core CPI, which strips out more volatile categories like food and energy—jumped 0.6% from July and 6.3% compared with this time last year.  

There was a general belief that the inflation problem is due to higher Oil and commodity prices; and once they cool off, the inflation problem will go away but the market participants now confront a new reality – stubborn inflation driven by higher wages that have now filtered into higher rent, food prices and other services cost. This inflation usually sticks and does not go away unless you crash the economy. This is the fear now. The US Central Bank will be relentless in raising rates and it will crash the economy much sooner than expected. This week, the US Central Bank is expected to raise rates by another 75 bps.

Goldman Sachs issued a warning last week that the US stock market can decline another 26% if the Fed’s rate-hiking causes a recession. Goldman Sachs is not alone, and other investment banks have opined along similar lines.

The Fear: Earnings Recession: Analysts have dramatically cut Q3 earnings expectations over the last 2-3 months. The earnings growth expectations for the S&P 500 now stand at just 3.7% for the third quarter. It was at 9.8% at the end of June. There is fear that earnings downside can be extremely steep, especially after FedEx’s warning on the state of the economy.

Wealth Effect – Feeling poorer: Most of the household networth is tied to equities and housing. Equities continue to decline and the housing market is already in deep trouble. Mortgage rates have surged past 6% this week, the highest level since November 2008. Demand for mortgages is now at a 22-year low. The overall purchase activity is 29% lower than a year ago. As more of your income gets consumed by higher inflation and net worth declines, people will pull back on spending which can have bad consequences for the economy. It becomes a vicious cycle.

What’s ahead ~ When in doubt, Stay Out

Nobody knows the future. The market never moves in the direction of consensus. Things look terrible for sure. If there is a complete market decline, nothing will get spared. It’s extremely hard to make a case for an upside in equities. One would be better served to watch the market from the sidelines.

What has worked?

Solar Stocks be it Enphase Energy, FSLR, 

Nuclear Energy Plays like CEG and Uranium ETF URA

Cybersecurity Stocks: Cloudflare NET, Palo Alto Networks PANW, ASAN

Nothing else seem to be working and I doubt how long they can hold on their own

Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purposes. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers