S&P 500 Sinks as Investors Debate the Fed’s Next Move

Critically, stock bulls are struggling to adjust to the more hawkish Fed policy than many expected to see in place by this point in the year. Remember, bulls at the beginning of 2023 were expecting the Fed to be in rate-cutting mode by the second half of the year. But inflation has remained stubbornly elevated amid an extremely strong labor market that recently showed signs of heating up again.

Bull’s Vision

While bulls are still motivated by signs of “disinflation” all around, there is a lot of uncertainty about how fast it might fall in the months ahead. Arguments are being made for fairly substantial declines to start showing up in the data as falling shelter costs filter through.

Some bullish insiders are now forecasting inflation could be back below 3% by this summer, though they are in the minority. Consensus sees inflation hanging between +3% to +6% through the remainder of 2023. In fact, Manhattan just reported its highest monthly average rents ever, so I don’t think inflation is really cooling.

Next Tuesday, the January Consumer Price Index (CPI) will be released which could be the bull’s next best chance to gain some upward momentum. That’s assuming the report shows that inflation slowed again as expected.

The year-over-year CPI rate came in at +6.5% in December versus +7.1% in November and a peak of +9.1% last June. The Producer Price Index (PPI) on Wednesday will likewise be scrutinized closely for further signs of declining cost pressures. Investors will also get updates on various economic measures next week, including Retail Sales, Industrial Production, Industrial Production, Empire State Manufacturing, and the NAHB Housing Market Index on Wednesday; Housing Starts & Building Permits and the Philadelphia Fed Index on Thursday; and Import/Export Prices on Friday.

Earnings and Data

Turning to earnings, the pace of results will slow substantially with most major US companies having now reported. There are some key highlights still to come next week though with Airbnb, Coca-Cola, Marriott International, Suncor, and Zoetis on Tuesday; American Water Works, Analog Devices, Biogen, Cisco, Invitation Homes, Kraft Heinz, Marathon Oil, Roblox, Shopify, Southern Copper, and Zillow on Wednesday; Applied Materials, DoorDash, DraftKings, Hasbro, Hyatt Hotels,

The Southern Company, and Vulcan Materials on Thursday; and Deere & Co. on Friday.

On the geopolitical front, the war in Ukraine could be set to escalate in the days and weeks ahead which could obviously have numerous implications. Western governments believe Russia is planning a major assault on Ukraine, possibly as early as next week before the 24 February anniversary of its full-scale invasion.

Its main goal is believed to be to capture the Donbas region, including Luhansk, which Ukraine partly controls. Ukrainian government sources say one scenario would include ballistic missile strikes on large cities including Kyiv, and an attempt to cut off the east of the country by bombing bridges and other key infrastructure.

Military experts are skeptical that Russia’s military has the manpower to carryout a rapid offensive deeper into Ukraine territory and any success will likely be limited to the eastern edges. Ukraine leader Volodymyr Zelensky is currently campaigning in the west for more support, including long-range missiles and fighter jets.

Russia warned on Thursday that the line between direct and indirect Western involvement in the conflict was disappearing. This raises the risk that the US and its allies get pulled into the war directly if Russia tries to declare the West’s support of Ukraine an “act of war” or use it as an excuse to attack a NATO member.