Markets Could Crash if This Line is Crossed

Since October 2022, the S&P 500 has been making a strong recovery. One of the narratives that helped support this was that the Fed was supposedly bluffing and was about to pivot to stimulate markets – this did not happen. The S&P had an especially positive June and July, breaking upward even more aggressively with the AI narrative. Despite central banks selling off assets – a worrying sign – August and early September had recovery bounces. 

Both narratives mentioned have been crushed by the Fed officials’ recent statements and one thing is clear: They were not exaggerating. Rates were and are being held high and the detriment is appearing in the markets. The S&P has been knocked down 5% in the last roughly 1 week. Notice the trend line (in yellow) on the chart below. The S&P 500 has maintained staying on top of it for roughly 1 year but is now facing a critical retest. If the price breaks below the yellow line, this could be a massive sell signal for investors and could evaporate hope of a nearby bull market.

Jamie Dimon Rattles the Cage

JPMorgan’s CEO has made fiery market commentary in the past, and it appears he is at it again. He was recently interviewed by the Times of India and was discussing the topic of 7% rates. His quotes were carefully crafted, talking about rate hikes as if they were guaranteed: “I am not sure if the world is prepared for 7%.” He also talked about the worst-case scenario of high rates combined with stagflation putting stress on the system. Is he genuinely concerned, or simply adding to the bad news to drive markets back down and allow for better re-entry? Either way, his statements are making major headlines.

Credit Problems Persist

The Credit Conditions Index was just released from the American Bankers Association this week. The CCI is their suite of diffusion indices that the American Bankers Association produce from surveys of North American banking institutions’ chief economists. The most recent release spells out a very dour outlook for the coming credit environment:

• The economists expect conditions in the credit market to worsen across the next two quarters.
• The Consumer Credit Index fell 6.5 point in quarter 4.
• The Headline Credit Index fell 2.8 points in quarter 4.
• The Business Credit Index had a very small rise of 0.9 points in the same timeframe, but most members expect this to worsen.

It should not come as a surprise that these chief economists’ predictions marry-up with recent movements on the chart above. It is worrying that they expect conditions to continue to get worse, meanwhile the S&P 500 is getting so close to its critical trend line. If they are correct, we may see a break.