False premises abound, along with rationalizations about the weakness that generally focuses entirely on the Fed's 'intentions' to continue battling inflation with higher interest rates. Sure, that's part of it, but there's more.

The 'sizzle starts to fizzle' in February, typically even in the best of times when you've had a requisite good upside 'January Effect', as we looked for this year as you know. That is irrespective of a contracting economy (Home Depot (HD) will show that more and impacts the DJIA (DIA) more by the way.. even as a 'cultural' or post-pandemic effect has actually reduced their business unrelated to Fed or rates).

And Fed Minutes Wednesday is what Tuesday's slide is partially about. Toss in the jumbled economic and geopolitical backdrop, along with breaking S&P 4000 nominally, and you have every reason for the day's 'absence of bids'.

You still have tons of stimulus and infrastructure in the system pending so let's not forget that. Oh yes, that's a 'lagging indicator' too, where you see layoffs in 'tech' majors, but increases in areas like Defense, AI or some Industrials that will benefit from the major spending. The Fed is their antagonist.

So you don't get a Fed pivot (we didn't think so..hence 'no landing' and range trading for S&P) .. yet.. barring catastrophe. 

China really is somewhat key to this, their economy is reviving, their Oil needs are increasing, and the clandestine ships from Iran or Russian Ural Oil as the deep discount prices (presumably in-exchange for some aid) reflect. Then we have a wild card, North Korea. If they attack Japan, we're at war with them. It is widely assumed their target would be South Korea (with attacking the U.S. a slightly hollow threat since an hour later Pyongyang would be uninhabitable for many years) but imagine if they attacked Japan or our bases on Guam. It's probably more likely than a war with China or even with Russia.

In-sum: 

The narrative focuses on the Fed and 'war' risks. Valid but not trading in a vacuum. We should not ascribe emotions and news reactions to multiple ticks in trades or rates. Pressure comes on markets as rates firm, but lots has already happened. I am not particularly bullish on the Indexes, but do believe selected special situation disruptive (or turnaround) stocks can act separately, although at times there are small moves in-harmony with the macro markets.

This post-Expiration sell-off continues the February roller-coaster and is very normal, if uncomfortable. We broke the S&P's 200-Day Moving Average last week and had a feeble rebound, and now continue in the direction of the initial break, hence lower. Next we should have some rebound try but that 200-DMA is resistance, barring some breakthrough on the world stage so far absent.

Bank lending standards tightening, higher 2 year yields, all of this 'usually' is sufficient for recession and a lower S&P low. Maybe, but for many stocks that was last year, and this is a pullback after January's relief rally. Many analysts believe has to make a lower year. Maybe, although I doubt they'll get quite so accommodated after a prolonged preceding decline. But if we're really in early stages of WWIII then of course it's an entirely different story than merely the 'recession overlay' argument that is the core of the bears case yet again.

Inflation is on the right trajectory, even as it's not the case in every sector. So the market tries to evaluate all this and you might have a better economy but in a sense that's negative for the Fed, while favorable for earnings. Jumbled.

Lots of focus on interest-rate sensitive areas even though the Fed mistakes a continued-capable U.S. consumer with somehow higher price expectations. It can be (demand pull inflation) but in this case not so simple.

Recent inflation to a large degree has it's roots in post-pandemic recovery as a torrent of money and liquidity was pushed into every aspect of society while the Fed was tardy (somewhat retarded in how they were reading matters) for too long with emergency low rates. The 'emergency' had ended, and the Fed was not inclined to normalize rates for basically an extra year hence we had a warning ongoing about more pain later. That came mostly in 2021 and 2022, the two year bear market. We think that ended and others think it hasn't.

Bottom-line: 

The jury is still out of whether we slide into deep recession, our Fed, in the process of hiking rates ends up hurting the segment of society it professes to want to help, and also whether the Fed even recognizes 'causes' of the inflation, which was primarily food & energy prices related to the war as well as 'climate change' issues.

All of which was interrelated and beyond the impact of stimulus and pandemic spending, wasn't something 'higher interest rates' alone would remedy. We've said that all along and I think the Fed's frustration and hawkish talk still fails to recognize that the core of the inflation concerns again .. aren't traditional that can be remedied by hiking rates higher for longer.. inverse of lower for longer that they did during the pre-snugging-up times.

And it's further complicated by the infrastructure package as sort of has the Fed butting-up against Congress and The White House. On top of that the Ukraine was impacts inflation in one other way: Russia and Ukraine account for about 25% of the world food supply, which has been starving for their grain for some time, with only limited shipments coming out of the Black Sea.

So in my view it's not just 'how long the US economy can handle higher rates', but a question of whether the Fed will belatedly recognize their judgement is failing to recognize the triggering factors (root cause) of inflationary moves.

Wednesday ought to be a bit of a breakdown, bounce, margin calls probably, and then another bounce, but I'm not expecting a huge rebound, especially as the FOMC Minutes will be on-tap. After that.. well it depends.

More By This Author:

Market Briefing For Tuesday, Feb. 21
Market Briefing For Thursday, Feb. 16
Market Briefing For Wednesday, Feb. 15