Market remains uncertain until early 2023

According to old stock market lore, the market will come back to fill the previous gap.

Currently, the S&P 500 has two gaps these days, one at around 4200 and the other at around 3800.

Which one will be filled first?

Wall Street needs the market to go as high as it can by the end of the year to save bonuses and jobs. The Federal Reserve needs to wipe out phantom savings and bring it down to force austerity.

So far, the market does not expect significant growth Fed fund rate hike.

The 1-Month T-Bill Rate tracks FFR over time and provides a real-time view of the market’s short-term rates.

The gray line below is the Fed Funds rate. The final vertical pop points to a potential rate hike of 50bip next week (not even the 75bip of the previous four hikes).

Note that the one-month rate trended higher before the previous two. The Federal Reserve hiked interest rates late last month, but has now been cut. Market participants have not invested in a significant interest rate hike.

The chart below shows the evolution of the yield curve since the beginning of the year. Fed hikes rates in March. The curve has risen and flattened as short-term interest rates have risen. Now notice the green line that is the curve for last Friday. There is little change in interest rates from 1 month to 1 year, but there is a significant pullback in long-term interest rates. Calling it ‘all settled’, the market expects these nasty high interest rates to come down next year (although interest rates are now approaching their 100-year averages).

The yield curve has been inverted for months. The recent move in long-term interest rates has accelerated the reversal, as seen in the chart below.

So, going back to the previous question, which gap is filled first? The gap above the current position or the gap below the current position?

Anything is possible in the short term – the next two months. History says the market is very likely to be higher at the end of the year, given his October-December period performance and that this year is the year of the midterm elections.But note on the first chart that we are still in the downtrend of the market, behind the recent short cycle uptrend and likely to continue in the downtrend direction. The Federal Reserve (Fed) has hinted at another rate hike next week, which will hurt the market. None of this is suitable for closing the higher gaps.

Looking outward, the inverted yield curve has become a reliable predictor of the future. This level of reversal precedes economic recessions and large stock market declines. Historically, these bad behaviors started several quarters to a year or more after the reversal.

Therefore, a reversal does not mean the bear market has ended and the bull market has begun. This means we have a long way to go before the next true long-term bull market begins.

This does not mean that we will not see profitable opportunities in the coming year. Active investors have more opportunities to participate in his 3-5 month cycles that occur in bear and bull markets. Unfortunately, most individual “investors” are passively saving money in 401(k)s and similar accounts that they don’t trade in, so long economic cycles can continue downtrends. is capricious.