Fed Dilemma – Inflation Or Recession? Which Would You Pick?

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Stocks took it on the chin last week, getting KOd by the one-two punch of higher-than-expected transitory inflation that inched up and FedEx’s earnings miss. Wall Street was hopeful that the Federal Reserve would be able to engineer a soft landing for the economy and ease on raising interest rates before the economy jammed on the brakes.

FedEx is a stethoscope that reveals the heartbeat of the economy. There is direct correlation to the amount of goods on the move and the economy. That’s why its earnings report is so important, and it wasn’t good.

FDX Chief Executive Officer (CEO) Raj Subramaniam said, “Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S.” The CEO continued, “We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations.” (1) The company warned earnings per share (EPS) could come in about 40% lower than current forecasts for the first half of 2023 – ouch.

Higher than expected inflation and drastically slowing demand puts the Federal Reserve in the position of fighting two monsters at once. Unfortunately, the medicine for one is bad for the other. Jerome Powell and company will likely have to pick one over the other.

That means interest rates are going higher to choke off inflation, even if it means a recession.

That was the conclusion Wall Street came to last week and why stocks got whacked. As a result, the NASDAQ continues to be in a downtrend, marked by lower highs and lower lows. For those that have followed us long enough, you know we call it walking down stairs.

Monday provided a little relief from selling. However, it’s our opinion that rallies might be best used as opportunities to sell into strength and build cash reserves. The NASDAQ is just a couple of bad days away from flirting with its 52-week low and potential psychologic and certain technical damage should the index fall below 10,000. Who knows what happens sub-10K?

Upside might be limited to 12,100ish. Price resistance and the 50-day average both make home there, which could attract sellers and trigger trading algorithms. For our perspective to change, the NASDAQ would need to close above 12,300ish.

For now, odds are the downtrend continues.

SECTOR WATCH

Nothing managed to stay above water last week. Community Banks were the top performer losing a little over 1% and then everything else lost at least 2.5%. There was no place to hide, except in cash. If the Federal Reserve doesn’t thread the needle between rates and recession, cash could be king for a while.

STOCK WATCH

There is no way we’d consider initiating new positions right now. The edge of the NASDAQ’s cliff isn’t all that far away.

Rich Meyers
Investing Trends