Good, Bad News Fuels Recession Concerns

In this article:

• GDP forecast grows bleaker
• Consumer demand is key to inflation
• Tickers, events to watch in July

Consumer confidence has fallen, manufacturing growth has slowed, and gross domestic product (GDP) is negative.

And, expectations are not hopeful for upcoming reports on unemployment and consumer credit.

Anyone searching for positives in this stock market is questioning whether there is a workable plan to trade this environment.

Good, bad news fuel recession talk

Recession is still the hot topic of concern, even as the Nasdaq attempted to keep the major indexes positive the session after Independence Day.

In the market today, the Dow rallied from almost 700 points down to close almost flat at 30,967.82 points to drop .42% (losing 129.44 points on the day). The Nasdaq set the upside pace to 11,322.24 points for a 1.75% move higher while the S&P 500 posted higher by .16% to 3,831.39 points.

The topsy-turvy day follows a see-saw stretch last week. Reports of a slowdown in economic growth spurred a market selloff and recession fears.

The S&P 500 posted a 2.2% decline last week that placed the index just above its 10-day moving average for some support before the slight gain today.

The Nasdaq fell 4.1% last week, fueled by steep declines in most of the mega-cap stocks before the sharp rebound today that recovered some losses. All but two of the technology mega-cap stocks (MSFT & AAPL) fell more than the Nasdaq last week as growth stocks traded lower.

According to the Federal Reserve Bank of Atlanta GDPNow forecasting model on July 1, 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.

GDPNow is a continually updated forecasting indicator and not the final, official second quarter number. Second quarter GDP results from the Federal Reserve (Fed) are expected to be released on July 28.

If a recession is to kick in after final second quarter numbers kick in, the push may fall squarely on consumers.

Spending activity among consumers came in below estimates and this weighs heavily in GDP numbers. Also, the U.S. Consumer Confidence Survey® fell to a 16-month low amid a slowdown in manufacturing.

The U.S. has experienced 12 recessions since World War II and each time economic output contracted and unemployment rose. Unemployment is low at 3.6% with a new report on jobs coming out on Friday with high anticipation of more jobs added in June than expected.

The strength of this bear market is highlighted by continued higher consumer costs such as gas and food. Copper and other metals have also lost value in the past months. 

There was some good news mixed with the bad.

While growth stocks traded lower on news of an economic slowdown, defensive sectors such as utilities, staples and healthcare turned higher for the week.

Energy stocks traded higher last week with a 1.2% gain amid a slight uptick in the price of oil to $122 per barrel. But oil tanked to start this week – with U.S. oil benchmark West Texas Intermediate crude closing down 8.23% at $99.57 per barrel.

It seems the good news will have to work hard to overtake the bad in this volatile market.

Further declining commodity prices and reduced consumer demand could help moderate high inflation levels. To that end, last week  the U.S. Core Personal Consumption Expenditures Price Index (PCE) showed that consumers are reducing their spending and changing their buying habits due to high costs.

Good news will struggle to gain traction because in the near term the market still has hurdles to overcome from slowing corporate growth that is expected to have a negative impact. Earnings reports that begin mid-month are also expected to be on the weak side.

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Will bear market roll over further?

As July gets moving, traders are watching for signs the market will roll over further.

Expectations are for overall more downside movement, but this market has on average been rallying into the first week of a month and then gapping down after mid-month.

Is there potential for a bear market rally before the next big puke? After today, bears should be cautious of getting their faces ripped off by sudden rallies.

Here are some highlights to watch heading into July:

• S&P 500 (SPY) Weekly Chart – The weekly squeeze firing to the downside in the SPY is worthy of a close eye this month. Once a squeeze fires on any time frame, the move typically lasts 8 to 10+ bars of momentum in that direction. This short squeeze could be showing  enough gas in the tank for another four to six weeks of steady downside movement.
• U.S. Dollar (DXY) – Markets tend to trade lower if the dollar trades higher. The DXY (closed up 1.3% at $106.50 on Tuesday) chart looks bullish with buy signals across multiple time frames. Markets are expected to grind lower if the dollar trades higher. For the stock market to have a solid chance of a rally, watch for DXY under $104.
• “Junk Bonds” (HYG) – As long as HYG trades lower, expect the bear market to continue. HYG is showing sell signals, suggesting a move into lower prices. For a bear market rally, HYG will need to trade above its daily 21 exponential moving average (EMA) at $75 or higher.

Some calendar events to watch this week include: U.S. Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS) numbers released on Wednesday along with Federal Open Market Committee (FOMC) minutes; Non Farm Payroll numbers released on Thursday; and a European Central Bank (ECB) speaking event along with U.S. employment numbers released on Friday.

The current market tends to bite on any unexpected news, so traders should keep a close watch on key events.

Testy waters ahead for retail traders

This stock market has presented some testy waters for retail traders, especially those looking for a way to trade with a professional.

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Long or short… stay focused on key signals

For Simpler’s traders, the game plan for this volatile environment is to take whatever the market has to offer, long or short, with a focus on key signals showing buy or sell. 

The caution is to watch as this market tends to rally into the eighth day of the month and fall into the 15th of the month. This can all be quickly altered by unexpected news which the market doesn’t digest well.

This is not a market where traders want to commit to setups too far in advance, and Simpler’s traders will continue to focus on short term possibilities.