While there are good reasons to be cautious, according to market analyst Charles Edwards, investors’ risk and recession expectations may be overstated.
The U.S. stock market has reached a critical juncture as inflation uncertainty rises after February’s lukewarm economic data. Despite investor concerns, the economy is showing signs of stability, which should protect it from major downside moves.
A growing sense of risk in the market is creating volatility for Bitcoin
. The major crypto asset, which shows a strong correlation with the US stock market, moved against the stock market in February, with the correction between BTC and the Nasdaq turning negative for the first time in two years. However, with crypto bulls resting at the $25,200 level, downside risks for the stock are increasing.
While there are reasons for caution ahead of new economic data and the March meeting of the US Federal Reserve, some indicators suggest the worst is over, bringing the market to new lows.
Inflation remains sticky
The biggest concern of the current bear cycle, starting in 2022, is the highest inflation in decades. The Consumer Price Index (CPI) was warmer than expected in January, rising by 0.2% from the previous month.
There are other signs that inflation may remain sticky. Inflation in the housing sector, which accounts for more than 40% of the weight in the CPI calculation, has not shown any abatement.
Consumer Price Index for All Urban Consumers: US Urban Average. Source: Fred
It is likely that the market will revert to a 2022 trend where rising inflation coincides with Fed rate hikes and weaker liquidity conditions. Market expectations for a 50 basis point increase rose from a single-digit percentage to 30% at the March 22 meeting. Fed Chairman Neel Kashkari also expressed concern that the Fed’s rate hikes showed no signs of taming service inflation.
However, Capriol Investments founder Charles Edwards said in a report that inflation was on a downward trend with a slight decline in January, but it was inconclusive.
“Unless we see the chart plateau or move higher, inflation risk is overrepresented and the market has already overreacted.”
From March 12, the February CPI release will play an important role in shaping market distortions in the short term.
According to Edwards, the risk of a recession is lower than ever
Despite the high inflation, the risk of recession in the stock market is very low. Edwards noted in the report that the employment sector remains strong and unemployment is low, which is especially surprising “at the end of the cycle.” adds:
“Extremely low unemployment combined with high interest rates increases the likelihood of deep unemployment (or growth).”
However, the market is more sensitive to rising unemployment. If the unemployment rate meets the Fed’s cooling, stock market declines could accelerate rapidly due to recessionary risks. The employment sector report for the month of February will be published on 10th of February.
According to the report, the S&P 500’s worst declines in 50 years were the same recession threats: -21%, -27% and -20%. The recent 2022 low also showed a -27% downtrend, encouraging buyers. This increases the likelihood that the S&P 500 will move lower.
Currently, the S&P 500 and the technically strong Nasdaq-100 index are in danger of breaking the 200-day moving average (MA) at 3,900 and 11,900 points, respectively. This suggests that the rally of late 2022 and early 2023 could be another bear market rally rather than the beginning of a bearish rally of this cycle. A move of the stock below its 200-day MA will put more pressure on the crypto market.
It should be noted that in December, while the stock market rose, the crypto markets remained unchanged after the fall of FTX. At the beginning of 2023, the crypto markets probably caught up with the stock market, and now you can see the end of the opposite reaction.
Related: Bitcoin Chain Data Highlights Key Similarities in BTC Price Between 2019 and 2023
Could it be a bear trap?
As the Fed prepares for new furor, the growing U.S. Treasury debt ceiling crisis is getting more attention. From mid-2022, when the Fed begins quantitative easing, the US Treasury will reduce liquidity injections. However, the excess liquidity will be fully withdrawn from the Treasury by June 2023.