US Stock Indexes Analysis: Fear Of Recession; Energy Crisis

The S&P 500 and Nasdaq are both sitting on double-digit losses down -18.3% and -30.9% respectively.

Central Banks Remain Hawkish

Investor worries have not really changed with the overriding consensus being that the US is headed for recession in 2023 as the wider global economy sinks and the Federal Reserve continues to tighten financial conditions.

Those fears are being exacerbated by aggressive tightening campaigns launched by other global central banks, including the European Central Bank and Bank of England which joined the Fed yesterday with their own 50-basis point rate hikes.

Keep in mind, major central banks are moving in unison to implement the most aggressive interest-rate hikes in four decades as they battle the highest inflation levels in a generation. The UK and the EU are doing this even as their economies may already be in recession.

The economics are worse in Europe than the US due largely to the energy crisis brought on by Russia’s war in Ukraine. Typically, central banks step in to boost faltering economies but the consensus among officials, including the US Fed, is that runaway inflation is a bigger threat than recession.

For stock market bulls, the silver lining of a possible recession has been a belief that slipping into one in 2023 might compel the Fed to back off its tightening campaign and possibly even walk back interest rate hikes.

The fact that this is not playing out in other Western countries raises concerns about how far the Fed might be willing to let the US economy sink. Bears have been sounding the alarms for a while now that investors are overly optimistic about the Federal Reserve coming to the rescue if the economy takes a nosedive, particularly if inflation remains high.

Bears also continue to warn that stock markets have not yet priced in the expected slowdown in US and global economic growth in 2023.

Bulls at the moment don’t have a very compelling argument with most signs pointing to further headwinds to come and investors embracing a more “risk off” mentality.

Most bulls still think we might see some upward momentum heading into year-end thanks to typical seasonal trends but the likelihood of major rally to end 2022 is diminishing. Markets could see even more extreme volatility today thanks to “triple witching,” or the simultaneous expiration of a flurry of stock, index, and futures options contracts.

Data to Watch

Looking to next week, the key economic data points will be PCE Prices and Consumer Sentiment on Friday. Data is otherwise sparse next week with just Housing Starts and Permits on Tuesday; the final estimate of Q3 GDP on Wednesday; and Durable Goods Orders and New Home Sales on Friday.

Remember, Christmas is next Sunday, so markets may be a little more volatile in the lead-up to the holiday as trading thins toward the end of the week.