Earlier today, there was a bit of optimism in the air with European equity markets rising noticeably. Investors were showing resilience in the face of rising interest rates, inflation, and recession risks. Granted, some indices and individual names were bouncing back from severely oversold levels, which should have been expected. But as I have been consistently warning, let’s not underestimate the big macro risks facing investors. It is far too early to be optimistic that this latest recovery will hold. In fact, the markets were starting to break lower after the early advance in the US session was rejected at the time of writing. The renewed weakness was triggered fresh data showing plunging consumer confidence.
Consumer confidence shattered
Last week we saw the University of Michigan’s consumer sentiment survey crash to record lows. Thus, the bar was set very low ahead of today’s publication of The Conference Board’s (CB) barometer. Even so, the CB’s consumer confidence index tumbled more than expected. The headline figure fell to 98.7 from a downwardly revised 103.2 and well below expectations of around 100.0. The slump in confidence was driven by a plunge in 'expectations' sub-index as the present-situation sub-index fell only marginally.
Business confidence was great either, judging by the latest read on the Richmond Fed manufacturing index. It fell to -19 compared to -5 previously to reach its lowers level since May 2022 – the height of the pandemic. New orders plunged big time, while expectations for conditions in the future worsening sharply.
What does it all mean for the markets?
Well, the latest data is pointing to recession and, as we will undoubtedly find out in the weeks ahead, lower earnings for companies. Against this backdrop, it is difficult to justifying buying stocks on the hope that the Fed will ignore inflation and start cutting back interest rates from as early as next year. I am therefore of the view that the markets will remain in the “sell-the-rallies” rather than “buy-the-dip” mode.
Nasdaq hits strong resistance
Unsurprisingly, the Nasdaq has once again underperformed because of its large constituents of technology companies. It has stocks that pay no or low dividends and were driven higher in the past by hopes that we will see strong, sustainable, economic growth.
The Nasdaq hit resistance at 12210/15 area yesterday, a level which marks the low point from last year. It has since fallen back below last week’s high at 12113ish. Remember that it was a strong performance from the markets last week and the apparent failure of the bulls to show up despite that, is rather bearish.
Of course, it is not the first time we have seen such a scenario. This is precisely how a bear market is meant to look and feel like.
Assuming the bulls will stay largely away, the Nasdaq could drop to 11700 from here, which is the base