A Recessionary Path For The S&P 500?

Economy Weighs On The S&P 500

The S&P 500 is in chop consolidation. However, there are signs that it is now following a recessionary path.

In our 19 September 2024 post, we noted:

“The Federal Reserve cut interest rates by 50 bps yesterday. The available data, while limited, suggests that a first rate cut of 50 bps is usually reserved for periods when the economy is tracking toward recession.”

While most economic indicators in September were not flagging a recession, we noted that they were signalling that the market and the S&P 500 could be in a late cycle.

Bond yields increased in response to the rate cut. This signalled that the bond or credit markets were not in alignment with the Federal Reserve’s economic projections, potentially signalling a lack of confidence in the economy’s future performance.

At the time, our view was that if the economy were heading into a recession, then statistically, it would become more evident in the six to nine months after the rate cut.

Technical Bear Market

Fast-forward seven months, and the S&P 500 is now in a technical bear market. “No recession” bear markets are rare and last week’s failure to make a higher high indicates that the probability that this is a buyable correction is low.

While the narrative that tariff uncertainty is a headwind is valid, introducing tariffs merely accelerated the late cycle dynamics and economic downturn.

Federal Reserve On The Sidelines

Last week, Jerome Powell stated that he considered the market functioning orderly and as expected. He remains cautious about further rate cuts until there is evidence of the impact of tariffs on inflation.

Financial conditions have tightened dramatically this year and events over the last four to six weeks have impacted the economy and future earnings in S&P 500 stocks.

The FED should put financial stability above anything else and add liquidity to try and stabilise the economy and markets.

In our 22 March post, we signalled that the S&P 500 would experience a correction, which would be met by fiscal and monetary stimulus, supporting upward momentum in the second quarter.

In the absence of a rate cut in May and/or certainty surrounding tariffs, the market is more likely to roll over. This aligns with our view that the S&P 500 will likely pull back further and potentially more profoundly in the second half of the year.

S&P 500 Key Levels:

The S&P 500 opens in positive gamma today, and the key levels remain unchanged from last week.

The gamma flip zone sits at 5260, the call resistance level is 5495, and the put support is 4995.

As noted in our previous post, we expect chop consolidation and the S&P 500 to remain range-bound at these lower levels for the remainder of the month as it attempts to re-price.