Bear markets are never easy… Not even for bears

Bear markets are never easy. Not even for bears. Today’s action is a reminder of that, and why the charter of POWR stock below $10 must remain at least 50% invested. In a way it reminds me of what happened in February when the markets continued to slide over the prospect of Russia invading Ukraine. Of course, when it actually happened, the markets went down massively and ended up green on the day. In the grand scheme of things, it didn’t affect the overall trend of the S&P 500 (SPY), but it frustrated bears, many of whom were likely forced to hedge or close positions on losses or with smaller gains. Today’s action was similar as the market fell more than 2% after a bad inflation report but ended up more than 2.5%. In today’s commentary we discuss today’s price action and two of the most important things impacting financial markets – the plunge in the pound and government bonds and inflation. Read on below for more information…. – StockNews

(Enjoy this updated version of my weekly commentary originally published October 13)e2022 in the Newsletter POWR Shares Under $10).

For the past week, the S&P 500 (SPY) is down 2%, though it was down nearly 7% at today’s low. The main catalyst for market weakness was a potential financial crisis in the UK.

It’s something I think about constantly, whether it’s an anomaly or a taste of what could be happening in the rest of the world.

In summary, the UK faces similar problems to the US and Europe in terms of inflation and a slowing economy. The Bank of England similarly aggressively raised interest rates to curb these pressures.

But incoming Prime Minister Liz Truss walked on a highly populist platform of subsidies to households and tax cuts. Essentially throwing more money into the economy as the central bank drains liquidity to fight inflation.

The core of the problem is energy. One side of the government tries to reduce demand to lower prices, while the other side distributes money to households, inevitably increasing demand.

Not surprisingly, the financial markets had an attack by bond vigilantes who penalized gilts as the UK economy’s forecast deteriorated and the pound fell in value. It got so bad that concerns arose about a solvency and liquidity crisis for pension funds, many of which own major gilts and have statutes on what to do in the event of losses.

It threatened to spark a financial fire that spread with the pain of gilts exacerbated by pension funds becoming forced sellers. The Bank of England intervened with a 2-week QE program to reverse the slide. Of course, this also undermines the fight against inflation.

But it is also necessary, of course, because risks to financial stability outweigh the risks of inflation.

The good news is that the short-term crisis could be over if the BoE intervention and Prime Minister Truss backs off on her plans for fiscal generosity.

But it’s easy to imagine this happening: A populist politician decides that relieving short-term pain is the best way to get elected.

Such a proposal could come from the right or left wing, as it has been tried many times in South America by left-wing politicians and has just been tried by Truss, a conservative.

Such measures in the midst of an inflation spiral can tarnish the credibility of currencies and governments. The long-term cost isn’t worth the short-term boost in spirits.

Inflation Report

The Bureau of Labor Statistics reported that inflation rose 0.4% in September, exceeding consensus expectations of a 0.3% increase. Year-on-year inflation was up 8.2% year-on-year, which was lower than the June peak of 9% inflation.

However, the report continued a larger trend of core CPI continuing to rise, with many hoping that the Fed’s rate hikes would have some effect in quelling inflationary pressures.

Core CPI came in at 0.6%, accelerating from 0.5% last month and above consensus expectations of a 0.4% increase. On an annual basis, core CPI stood at 6.6%, the highest level since August 1982.

The stock market collapsed on the news with the S&P 500 (SPY) opening 2% lower.

This was despite futures having risen ahead of the inflation report on reports of a potential policy change by incoming British Prime Minister Liz Truss and better-than-expected earnings reports fueling optimism that the third quarter could see continued earnings growth.

However, the market surprised the bears with an increase of almost 3%.

Market participants attributed the strength to the UK policy change that removed some tail risk from the markets, and many saw the current report highlight a ‘peak’ in core CPI due to recent labor market developments and real-time property market data showing a softening of rents should predict.

The bond market also recovered as the 10Y peaked at 4.1% before closing at 3.95%. An interesting note about the market action is that the leaders were higher quality companies, including those in the defense and utilities sectors.

Turning to the inflation components, food prices increased by 11.2% year-on-year. This was more than enough to offset the impact of a 4.9% drop in gas prices. Rents also rose by 0.7% and 6.6% compared to a year ago.

Overall, the inflation-based average hourly wage fell 0.1% and is 3% lower than last year.

The CPI report led to the probability of a 75 basis point increase at the November meeting increasing to 98%. The probability of a 75 basis point increase at the December meeting also increased.

Final Thoughts

This was technically a very strong move as the market was once again above the mid-June lows, a major turning point.

That said, stock market fundamentals continue to deteriorate. This rally was about some tail risks coming out of the market and a very oversold market.

It was also a classic ‘buy the rumor, sell the news’ kind of situation, as many were positioned for a beat in inflation.

So this move up could certainly turn into a bear market rally, but I don’t think it would be wise to expect anything more meaningful.

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All the best!

Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Shares Under the $10 Newsletter

SPY shares closed at $357.63 on Friday, down $8.34 (-2.28%). Year-to-date, the SPY is down -23.83%, versus a % increase in the benchmark S&P 500 index over the same period.

About the author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for and the editor of the POWR growth and POWR Shares Below $10 newsletters. Read more about Jaimini’s background, along with links to his most recent articles.


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