The US stock market is nearing a crucial turning point as uncertainty about inflation mounts after better-than-expected economic data was released in February. Despite growing investor concerns, the economy is showing signs of resilience that could protect it against a significant downside.
The rising risk-off sentiment in the market is also creating volatility for Bitcoin (BTC). The leading crypto asset, which has had a strong correlation to the US stock market, moved against the stock market in February, with a correction between BTC and the Nasdaq. turning negative for the first time in two years. However, with crypto bulls stopping at the $25,200 level, the risks of a recession along with stocks are increasing.
While there is certainly reason to remain cautious until the release of new economic data and the US Federal Reserve meeting in March, some indicators suggest that the worst may be over in terms of the market reaching new lows.
Inflation remains stagnant
The biggest concerns of the current down cycle, which began in 2022, have been the high inflation of the decade. In January, the Consumer Price Index (CPI) turned out to be more positive than expected, with an increase of 0.2% compared to the previous month.
There are some additional signs that inflation may remain stagnant. Inflation in the housing sector, which dominates more than 40% of the weighting in the CPI calculation, has shown no signs of recession.
It appears that the market is returning to the 2022 trend, where rising inflation corresponds to further Fed rate hikes and poor liquidity conditions. The market’s expectation of a 50 basis point rate hike at the next meeting on March 22 has gone from single-digit percentages to 30%. Fed Chairman Neel Kashkari also increase concerns that signs are lacking that the Fed’s rate hikes are curbing inflation in the service sector.
However, a report by Charles Edwards, founder of Capriole Investments, argues that inflation has had a downward trend with a minor setback in January, which is not conclusive.
“Until we see this chart flatten or rise, inflation risk is overestimated and the market has so far overreacted.”
The February CPI release on March 12 will be instrumental in creating short-term market bias.
Edwards says recession risk is lower than ever
Despite the high levels of inflation, the risk of recession in the stock markets has been considerably reduced. Edwards notes in the report that the labor sector remains strong with low levels of unemployment, which is surprising, especially at the “end of the cycle.” He adds:
“Ultra-low unemployment combined with high interest rates increases the odds that an unemployment bottom will be reached (or formed).
However, the market is also more sensitive to rising unemployment from here. If unemployment levels react to the Fed’s hawkishness, a stock market dip could quickly add up due to recession risks. The February labor sector report will be released on March 10.
According to the report, the worst declines in the S&P 500 Index in the last 50 years, when similar recession fears were prevalent, have been -21%, -27% and -20%. The last bottom of 2022 also hit the -27% slowdown mark, which is encouraging for buyers. It raises the possibility that the S&P 500 has bottomed out.
Currently, the S&P 500 and the Nasdaq-100 Technology Index are at risk of breaking below the 200 daily moving average (MA) at 3,900 and 11,900 points, respectively. It raises the possibility that the late 2022/early 2023 surge was another bear market rally rather than the beginning of bottom-out accumulation for this cycle. A move below the 200-day moving average for the stock market would add additional pressure on the cryptocurrency market.
In particular, in December, when the stock market was rising, the crypto markets were flat after the FTX crash. In early 2023, the crypto markets likely caught up with the stock market and could currently be experiencing the end of the opposite reaction.
Related: Bitcoin On-Chain Data Highlights Key Similarities Between 2019 and 2023 BTC Price Rally
A possible bear trap?
As the Fed prepares for a renewed hawkish stance, there is more pressure on the upcoming US Treasury debt limit crisis. Since mid-2022, when the Fed started quantitative easing, the US Treasury The US has facilitated the injection of liquidity through the back door. However, the additional liquidity from the Treasury will be completely depleted by June 2023.
Market optimism earlier this year was likely related to the assumption that the Federal Reserve would start cutting interest rates when Treasury funds ran out. However, if inflation picks up again and the Fed continues to raise rates, the economy will be in a precarious position by June, with expensive credit and limited Treasury liquidity.
Still, as Edwards mentioned, “there is no question of risk in the market,” but the economy is in a much healthier position than expected. The probability of a recession has dropped to 20% from 40% in December. The current weakness could be a bear trap before sentiment improves again Much will depend on the economic data release this month and price action around crucial support levels.
The views, thoughts and opinions expressed here are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.
