After the S&P 500 broke below its two-month rising support line, the bears regained control of the overall stock market. However, the FOMC conference is coming.
After the S&P 500 broke below its two-month rising support line , the bears regained control of the general stock market. However, with the index ratcheting higher amid the inflation optimism on Dec. 13, the FOMC and Chairman Jerome Powell’s press conference are next on the fundamental docket.
Moreover, with silver closing at a new monthly high (though, it still couldn’t hold $24), the white metal and the S&P 500 have benefited from bullish seasonality, a weaker USD Index and lower U.S. real yields. But, with the crowd misjudging the fundamental path ahead, the S&P 500 could send the silver price into a nosedive.
For example, liquidity-fueled assets like Bitcoin and ‘profitless tech’ have borne the brunt of a hawkish Fed and higher interest rates in 2022. In contrast, with the U.S. economy remaining resilient, economically-sensitive sectors like materials, energy, industrials and financials have fared much better, and the Dow Jones Industrial Average (DJIA) has materially outperformed the S&P 500.
Please see below:
To explain, the blue bar on the right side of the chart shows that the DJIA has surpassed the S&P 500 by nearly 10% as of Dec. 7, and the relative strength is the largest since the 1930s. As such, investors have been rotating money out of QE beneficiaries and into ‘old economy’ stocks rather than liquidating their portfolios.
Likewise, with Bank of America’s U.S. Regime Indicator still signaling a “late cycle,” the panic witnessed during prior bear markets still awaits us.
Please see below:
To explain, the blue line above tracks Bank of America’s U.S. Regime Indicator. If you analyze the right side of the chart, you can see that the metric signaled modest growth as of the end of October. Conversely, the red circles show how the indicator turned deeply negative during the last three recessions, and with every inflation fight since 1954 ending with a recession, the ‘old economy’ should confront material downside before the next upturn begins.
Remember, the U.S. federal funds rate (FFR) has also eclipsed the peak YoY core CPI in every inflation fight since 1961; and since the YoY core CPI peaked (for now) at 6.66% in September 2022, the historically-implied peak FFR is at least 6.67%. Thus, economic growth should suffer mightily as the Fed’s inflation fight continues in 2023.
To that point, Morgan Stanley’s Chief U.S. Equity Strategist Mike Wilson said on Dec. 13:
“The magnitude and timing of the earnings decline we expect implies that labor market risk may be underappreciated…. We recall a similar set up in August 2008 from an EPS standpoint to remind investors the market usually takes longer to price such earnings declines than one might think/expect.”
So, with market participants hiding out in economically-sensitive sectors like materials, energy, industrials and financials (as well as defensive sectors like health care, consumer staples and utilities), the drawdowns that hit the QE beneficiaries in 2022 should hit the ‘old economy’ in 2023.
Please see below:
Source: Yahoo Finance
Also noteworthy, the NFIB released its Small Business Optimism Index on Dec. 13. The report stated:
“Inflation remains the top business problem for small business owners, with 32% of owners reporting it as their single most important problem in operating their business, five points lower than July’s highest reading since the fourth quarter of 1979.”
In addition:
“The net percent of owners raising average selling prices increased one point from October to a net 51% seasonally adjusted.”
On top of that, the largest monthly increases occurred in categories that are bullish for the FFR.
Please see below:
To explain, the net change in earnings trends increased by eight points month-over-month (MoM), while the net change in real sales increased by five points MoM. As a result, small businesses are becoming more optimistic.
More importantly, their “single most important problem” is inflation, not weak demand, and higher interest rates should persist in 2023, which is bearish for the S&P 500 and the silver price.
Please see below:
Source: NFIB
To explain, respondents noted that inflation is their “single most important problem,” with the reading increasing from 18 in November 2021 to 32 in November 2022. Conversely, those worried about poor sales declined from 5 in November 2021 to 4 in November 2022. As such, the Fed’s inflation fight should be one of attrition, and the ‘old economy’ should take a major hit as the liquidity drain continues.
Overall, silver’s fundamental and technical backdrops remain highly bearish, and we view the recent rally as a countertrend upswing within a medium-term downtrend. Therefore, while seasonality keeps the bulls’ spirits high, a final sell-off should occur before a long-term buying opportunity emerges.
Alex Demolitor
Precious Metals Strategist