In recent weeks, fears of a US default have been felt from many quarters; frankly, in our opinion, the danger is not so much the concrete fact that there may be an actual default by the United States, but that there may be a panic that may spread in a more or less manoeuvred or more or less hysterical way that contributes to depressing the market mood.
The consequences for the stock market would, in this hypothesis, be quite pronounced; the variables involved, in predicting the magnitude of the movements, are still uncertain, depending on the relative highs that the market will go to in May (and thus the initial point of fall) and, even more so, the duration of the phase of uncertainty, which could probably extend throughout June and at least part of July.
Although we do not believe that the lows of 2022 will be violated, we cannot rule out that if the bearish phase should persist for a long time in the summer of 2023, they will be retested or barely pierced. On that occasion, again we would cry catastrophe with the most fanciful predictions for the S&P500 to reach 2000 highs, as we have seen it do frequently in the past 12 months. If the S&P500’s highs in May were in the 4300 area, a bearish leg down to 3500 would mean an 800-point wave, which we have certainly seen several times in the past.
Many, moreover, are the support areas to be broken, and, in particular, we could test the holding of the 3788 area: in the latter case, the hypothesis would be a fall of about 500 points, or even less.
These are the most likely hypotheses, with the data known at the moment. When we see the next relative highs of the S&P500, we will have more precise assessments to make.
We do not believe that we will see “the real catastrophe” in 2023, meaning a decline of more than 35% from the January 5, 2022 high. And the lows of 2022 still remain a very important reference point.
Some of our indicators see a huge risk phase for the markets materializing sometime after November 2024, with declines that could exceed 50%. But more on this in due course. In the meantime, in unusual weather, with U.S. markets with very short hours for futures only and equities closed, a flattering non-farm payroll was released confirming, once again, a very strong U.S. economy with 236,000 new jobs created in March, slightly more than expected, unemployment rate back to historic lows at 3.5%.
The forecast for the inflation figure, to be released next week, is now 0.4% month-on-month. This condition favours a further 0.25% rate hike at the FED meeting in early May.
On the other side, concerns about the banking sector are growing, with rather anxious statements even from Orcel, CEO of Unicredit.
Analyzing the data on job creation, we observe that three sectors have been leading the way: public employment, leisure/hospitality, and education/private healthcare. At the same time, construction, manufacturing, finance, and retail trade are in the negative.
While employment data seem to confirm optimism, the outlook is becoming increasingly complicated and difficult.
Banking tensions could interrupt the flow of credit to the economy. Business confidence is at recessionary levels, and the housing market is in obvious trouble.
All of this is a toxic mix for new job creation: in the second half of 2023, we could see much fewer positive non-farm payrolls than in the past 18 months. Further confirming this trend is an increase in the number of layoffs and claims for unemployment benefits.
The combination of higher borrowing costs, disrupted credit flow, low business confidence and a stalled housing market increases the chances of a hard landing for the economy, which means inflationary pressures will moderate more quickly.
We are beginning to think that if the above negative trends develop during the second half of 2023, May could be the last rate hike of the year. And we might even think of a rate cut and a subsequent change of course by the Fed at its last meeting of the year 2023, in December.
The situation is very delicate, and a slide is a big risk to take in the coming weeks, starting in mid-May, a price to pay to regain a less precarious balance toward the last quarter of the year.