Many investors chased the market in the month of November hoping the Federal Reserve will “pivot” concerning its monetary policy, but the reality is when the Fed cuts interest rates, it is not the end of equity ‘bear markets,’ but rather the beginning. The reason is that the Fed’s policy pivot comes with the understanding that something is wrong with our economy and the financial markets reprices for lower economic and earnings growth rates, hence the word RECESSION. The chart below demonstrates that the majority of “bear markets” occur after the Fed’s pivot.
While investors are still relying on the Fed to the rescue and keep hunting for opportunities in the stock market, the reality is that the estimated profit margins at most companies in the S&P 500 will deteriorate as current forward estimates for earnings and profit margins remain elevated. Plus earnings have not adjusted nearly enough to account for the reduction in consumer demand. So even if the Fed pivots there is absolutely no indication they are about to reverse course from a tightening policy to an accommodative policy. Remember, the Fed hikes rates to curb inflation thus slowing the demand side of the economy which leads to higher unemployment, slower economic growth, and reduced earnings. All of which are not supportive of higher asset prices as evident by the very forward looking Elliott Wave patterns. The current pattern suggests S&P 500 is entering the 3rd minor wave of the 3rd intermediate wave selloff, the most powerful event in Elliott Wave sequence.