Range Bound in Search of a Bias
Welcome to the frustrating stock market. Stocks have moved sideways over the past two months due to the lack of major economic catalysts. Wall Street’s confidence is low, as investors grapple with mixed data.
Stocks will be stuck in a narrow trading range into the foreseeable future, until we learn the Federal Reserve’s next move. The Fed’s policymaking Federal Open Market Committee (FOMC) meets June 13-14. Until then, equities will probably continue to tread water.
Investors expecting a dovish pivot have suffered several “head fakes” this year. Maybe this time around, that optimism will be justified.
The latest good news on inflation is cheering investors, leading to realistic hopes that the Fed will pause on tightening next month.
But economic growth has been impeded so far this year, due to the central bank’s boosting of interest rates to fight inflation. Worries over the U.S. debt ceiling impasse are exacerbating recession fears. Investors await the next catalyst that will break stocks out of their range.
That said, consumer spending is showing resilience in defiance of inflation and higher rates, and the labor market remains robust.
The U.S. economy is sputtering, but it’s not screeching to a halt, either. American households are supported by more than $1 trillion in accumulated savings. This hoard should help shore up household spending, despite the softening of the economy.
Inflation and Fed policy headwinds are dissipating, but rate hikes tend to exert a lagging effect, which means an economic speed bump awaits. You should keep your portfolio calibrated to long-term strategic allocations.
Markets climb a wall of worry, and one of those worries this week has been the U.S. debt ceiling fight. I expect the debt ceiling impasse will be resolved, but it may come down to the eleventh hour, as it has in recent years.
While the clock is ticking, the message of the market suggests that (maybe) some sort of compromise will be reached without causing a steep decline in share prices.
In 2011, the political game of chicken over the debt ceiling caused the S&P 500 to plunge 16%. There’s a good chance that 2023 won’t be 2011 redux. President Biden and U.S. House Speaker Kevin McCarthy (R-CA) this week appear to be close to a deal, which would be a miracle considering the bitter polarization in the nation’s capital.
On Thursday, the main U.S stock market indices extended their gains from Wednesday, and closed higher as follows:
- DJIA: +0.34%
- S&P 500: +0.94%
- NASDAQ: +1.51%
- Russell 2000: +0.58%
Hopes for a debt ceiling deal drive stocks higher. I usually advise readers to tune out the white noise in Washington, but the stakes in this instance are too high to ignore. If the U.S. is allowed to default on its debts, the consequences would be catastrophic.
Many pundits are now saying “Don’t worry! We won’t default.” But any debt ceiling compromise would still require a separate vote in the House and a separate vote in the Senate, and there’s no guarantee of passage in either chamber, especially the fractious House.
WATCH THIS VIDEO: What The 2011 Debt Ceiling Crisis Teaches Investors Today
It’s an auspicious technical sign, though, that the S&P 500 hovers above both its 50- 200-day moving averages (see chart).
The moving average represents the average closing price over the past designated time period. The moving average gives us a clue as to whether the trend is up or down; it also identifies potential support or resistance areas.
Volatility is likely to increase and the bear market is still with us. But the stock market’s pattern of higher lows signals an uptrend.
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John Persinos is the editorial director of Investing Daily.
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