Traders Face Inflation, Stock Market Uncertainty

In this article:

• Market under constant pressure
• Fed plans more rate hikes
• Has inflation peaked before summer?

The stock market continues its grinding chop as participants nervously watch recession signals, including the release of Federal Open Market Committee (FOMC) meeting minutes today and U.S. employment numbers set for release on Friday.

How much uncertainty and pain can market participants endure?

They will need to hang on for the foreseeable months ahead.

Traders face summer of market uncertainty

Simpler’s traders are not expecting a smooth ride in the stock market through this summer.

The sentiment is that the pain of this choppy environment may continue as the market stair-steps from low to higher into August or September before possibly dropping lower than current levels.

The market is under constant pressure – from Fed to inflation to interest rates – and any significant change in direction will take months to take effect and be noticed by the general public.

For example, analysts predict that crude oil is heading lower, but a drop in price will be delayed to consumers suffering at the pump. This stems from oil being purchased at a higher price (up to $122 per barrel) and gasoline sent to the pumps was refined from the higher prices.

Gasoline refined from lower oil prices (benchmark West Texas Intermediate crude closed down 1.38% at $98.13 per barrel on Wednesday) won’t hit the consumer market for months.

Some analysts and traders are estimating that inflation has hit its peak but, again, the results of lower inflation won’t be experienced until possibly the end of the year or beyond.

And, lower inflation does not eliminate a recession, which is likely imminent or already underway.

The GDPNow July 1 forecasting model from the Federal Reserve Bank of Atlanta is showing the latest estimate for second quarter U.S. real gross domestic product (GDP) growth is -2.1%. Combine this result with the 1.6% GDP decline in the first quarter, and the back-to-back negative GDP numbers reveal a recession in play.

Final, official second quarter GDP results from the Federal Reserve (Fed) are expected to be released on July 28.

Many factors are contributing to the uncertainty of this market, including the rising dollar, collapsed commodity prices (such as copper and wheat). Simpler’s traders are staying cautious for another strong flush to the downside before things “level out.”

The good news is that the stock market tends to have these downside factors “baked into” the market mix. The bad news is that it will be months before any noticeable change trickles down to consumers.

Expectations are that all these factors fighting against one another – especially any receding inflation – will force the Fed to start lowering interest rates again. But don’t expect that scenario to play out for another eight or nine months.

Especially after the FOMC minutes were released Wednesday afternoon.

Federal Reserve officials revealed consideration of a 50 or 75 basis point increase in July (the next meeting is July 26-27). The Fed is holding to a more restrictive plan that “could slow the pace of economic growth for a time” and the Fed goal remains to counter inflation that persists at high levels. 

While the Fed and the economy wrestle with all contingencies, traders in the meantime must work to navigate what the market gives as the battle rages.

Possible earnings ‘run up’ weakens

The past 11 months have shown a consistent trend where the market rallies into the eighth day of the month and falls after the 15th of the month.

So far this week the market has struggled, but held to the trend today – barely.

The Dow closed at 31,037.68 points to climb .23% (adding 69.86 points on the day). The Nasdaq made it to 11,361.85 points for a .35% gain while the S&P 500 finished up .36% to 3,845.08 points.

The trend of falling after the mid-month point may hold true as earnings season begins and expectations are that this earnings season may be rough going. Earnings will cover second quarter results.

The shadow of the first quarter where earnings reports were strong, but the market didn’t like the results is a point of caution for retail traders. In past bull market earnings seasons, traders could focus on bullish, upside moves into earnings reports that beat expectations, followed by positive price moves post-earnings.

Disappointing earnings reports have traders considering that weak corporate guidance may affect operations moving forward.

In the previous bull market traders focused on price running higher into earnings. This bear market shift has prompted Simpler’s traders to watch for downside movement and not commit to bullish run into earnings plays.

Here’s what to watch going into earnings season next week:

Here are three key phases:

• Before earnings – Run into earnings setups have changed with the shift from a bull to a bear market. Tickers can move up or down or simply chop along compared to past environments where the “run up” in price was expected.
• Earnings report – As always the report can send a stock price moving against a pre-earnings position. Even if a company beats earnings, it may not be “enough” for the market which can send the price unexpectedly tumbling.
• After earnings – Once any big move occurs after the earnings report – up or down – price can move steadily one way or the other. Many traders wait until after the earnings report to consider a trade setup.

Each phase has advantages and disadvantages for traders working through this market uncertainty.

Learn more about trading earnings season during this active time period.