Recession Caution Follows Banks’ Earnings

As banks began reporting fourth quarter earnings, good or bad, headlines started cropping up regarding a central theme – mild economic recession ahead.

And the caution poured out by the banks spilled over into the stock market which was choppy to the point of presenting difficult trading conditions.

When the market shifts and twists – losing ground before pulling back to positive at the close – what keeps traders from getting trapped in the turmoil?

‘Mild recession’ ahead, says bank chairman

Top brass at JPMorgan Chase & Co., Bank of America, and Citigroup Inc. all reported 2022 fourth quarter earnings on Friday with varying levels of profit and across-the-board caution for 2023.

“The U.S. economy currently remains strong with consumers still spending excess cash and businesses healthy,” stated Jamie Dimon, Chairman and CEO of JP Morgan Chase & Co.

He followed his press statements with media interviews where he cautioned of a “mild recession” ahead.

“We still do not know the ultimate effect of the headwinds coming from geopolitical tensions including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation that is eroding purchasing power and has pushed interest rates higher, and the unprecedented (U.S. central bank) quantitative tightening.”

These key banks kicked off earnings season which heats up over the coming weeks. After the bank earnings numbers were released the three major indexes showed a calmer sentiment among stock market participants.

Stocks closed Friday on a winning week with the Dow inching higher to 34,302.61 points to gain .33% (adding 112.64 points on the day). The Nasdaq notched higher to 11,079.16 points for a .71% improvement while the S&P 500 rallied higher by .40% to 3,999.09 points.

Avoid traps of stock market turmoil

This stock market has presented new challenges for traders that will continue through 2023.

Traders can no more control the stock market than they can inflation or the Federal Reserve fighting inflation. The key is to not get trapped in the turmoil.

“One of the most critical things that will separate you from being a successful trader and lasting in this game is really focusing on the things that we can control,” said Taylor Horton, Vice President of Directional Options Strategies at Simpler Trading. “As traders, we are not in control of everything.”

The stock market opens each day with a new slate, and can present unexpected challenges.

“My best advice is to focus on what you can control,” said Taylor. “There are a few things we can control as traders: showing up every day with a game plan, ready for either direction. Keep in mind that every day we can go higher, lower, or even nowhere.”

Focus on controlling trading plan, risk, emotions

No one knows the exact direction of the market ahead and each trading session starts at the opening bell. As a day trader, Taylor sees his job as seeing what the market is doing and reacting.

“Once we recognize what the market is doing based off information provided from the open, that is when we need to focus on what we can control,” Taylor said. “We have no clue what the market will do every single day. We all have to be humble enough to understand that.”

When the stock market is on a tear, and tearing up market participants, traders can always default to what they can control – a pre-defined trading plan, risk exposure, and emotion.

“This is a skill set that needs to be developed sooner rather than later,” Taylor said. “Understand, as a trader, it’s your job to process information and make good decisions. Always focus on the things you can control.”

This skill set allows traders to navigate market conditions on the traders’ terms.

“When we see the market chopping, being aggressive and likely to hurt you rather than help you, we need to have that mental discipline and emotional control to really step back, take a hold of ourselves and not allow these days in the market to do more damage than they need to do,” Taylor emphasized.

Follow Taylor more in the Simpler Central trading room or in his newsletter.