Why I Suspect The Market Is About To Break Down

During the three weeks from Friday March 29 through Friday April 19, the S&P dropped from 5,254 to 4,967 (287 points or 5.5%). When it rallied from Monday April 22 through this Monday April 29 to 5,116 (149 points) – erasing half of the losses of the previous weeks – bulls assumed that we’d seen the worst of a standard correction.

Personally, I suspected that it was “bull trap” which I tweeted on Tuesday April 23 at 3:27pm EST. That is, I suspected it was sucking in complacent bulls who subscribed to the above standard correction narrative before the rug was about to be yanked from underneath them.

My conviction has been fortified by the failure of the S&P to get through its 50 DMA. Five of the six Magnificent 7 companies that were to report earnings last week and this have already reported – and it hasn’t gotten the S&P through its 50 DMA. Only Apple (AAPL) remains to report on Thursday afternoon.

In addtion, weak comps from two blue chip food retailers on Tuesday suggest to me that the consumer is under pressure and the economy may finally be starting to feel the bite from all of the Fed’s rate hikes. On Tuesday morning, McDonald’s (MCD) reported 1Q24 US comps of +2.5%. That’s down from 4.3% a quarter ago and 12.5% a year ago. In 3Q23, it was 8.1% and 2Q23 10.3%. Clearly there is a trend here and MCD’s sales are rolling over.

The numbers out from Starbucks (SBUX) Tuesday afternoon were even worse. North America comps were -3% in 1Q24, down from +5% in 4Q24 and +12% in 1Q23. In addition, SBUX lowered its full year global comp guidance from +4% to +6% to a low single digit decline to flat. Clearly, SBUX customers are cutting back in a big way. SBUX shares are -17% right now.

There has been a lot of debate about why the Fed’s rate hiking campaign hasn’t seemed to impact the economy this time around. Some people think it’s not going to this time. Others – like myself – have believed that – for a variety of reasons – it’s taking longer for the rate hikes to work their way through the system this time – but eventually they will and the economy will roll over as is the historical pattern. These results from MCD and SBUX are a piece of evidence that it’s happening now.

In this context, it’s worth mentioning that we’re less than two hours away from a Fed Decision and Powell press conference. The Fed will hold rates steady. The question is Powell’s tone: Will he lean hawkish for dovish?

The consensus seems to be that he will lean hawkish because the economic data of late does not support cutting rates just yet. But if I’m right about the meaning of MCD and SBUX results, the Fed is staying too right for too long as the economy is now starting to roll over. That means we can expect a nasty recession in the not to distant future. Of course, when the Fed realizes this, they will scramble to quickly cut rates. But by then it will be too late.