No Fed Pivot?
The US stock market was down hard yesterday on news that the US service sector remained strong thus leading to ideas that the Fed won't pivot soon and cut rates.
Here's what is going to happen:
- The US will go into a double dip recession starting in 1Q2023. This will be led by the manufacturing and whole sectors with housing dropping sharply.
- The service sector has NEVER gone into a recession in the post WWII era except in 2008 so don't look for it to go into a recession next year either.
- Right now, I look for the Fed to tighten to a terminal rate of about 6%, higher than the market. The reason is that inflation is not going to come down much below the current roughly 7% rate. Why?
- Because the labor market remains strong so companies are having to bid up labor costs to get people to come to work. There are about 3.5 million workers that have yet to come back after the Covid mess and that is a big chunk of the labor force. Note also that the labor participation rate also ticked down showing people are leaving the labor force. Net result? Higher wages. In additions, workers are suffering real wages declines and will get more aggressive about trying to get raises.
- Inflation will not go down much for another reason. The collapse in the housing market means that people will be moving into rental housing because they can't afford a to buy a house. But there is a screaming shortage of rental houses so rents will still climb in spite of a recession.
- So volatile inflation factors will be pretty moderate but stick inflation factors will stay high through nearly all of next year. Meaning...
- ...that the Fed will remain tighter than the market expects. But...
- ...the stock market will continue in a bull market for the whole year.
- I know, you are saying that a tight Fed will crush the market. Nope. The market discounted the tight Fed this year and will continue to discount the easy Fed next year.
- We are currently in the Climbing The Wall Of Worry phase of the bull market right now.
- I'm staying long and strong in stocks right now.
- Check out my weekly video newsletter, Wall Street Winners, to get my current specific trades to make money in this bull market.