Break it or make it – SP500 is on the edge

Stock investors are trying to figure out the markets next move as all three indexes just tumbled back below the June lows, it is not surprising that the CBOE Volatility Index, aka the VIX, has climbed to its highest levels since mid-June as well, trading to over 32 yesterday.

Are we into recession?

Bears will argue that if the US economy takes steps toward a more full-blown recession and investor sentiment turns even more bearish the S&P 500 could tumble to sub-3,000 levels, which is where the market was trading in October of 2019 a few months prior to the Covid outbreak.

The US dollar is creating a major headwind, and wage-growth looks difficult to slow. Meaning overall corporate profit margins could remain in the crosshairs for an extended period of time.

The Federal Reserve's aggressive tightening program continues to fuel the US dollar rally while also pushing bond yields higher, two major pain points for stock bulls right now. A report from EPFR Global circulating shows that some +$30 billion flowed into cash last week alone, raising investors' total cash pile to +$4.6 trillion. There is another +$18 trillion sitting in bank accounts and +$150 billion in ultra-short bond funds. It's likely that, return wise, money markets and bonds will only get more attractive as their rates climb in-step with the Fed's benchmark rate, at least until investors believe the Fed is nearing the end of its rate hiking campaign. The high degree of volatility and general uncertainty stands to continue boosting the appeal of these "safe havens" at the expense of money flowing into stocks. While that massive pile of cash will likely make its way back into stocks eventually many investors for now seem inclined to wait for more clear signs that the Fed is going to back off.

Many believe that a slowdown in the housing market could take a big bite out of overall inflation levels as shelter costs account for about a third of the Consumer Price Index (CPI). The pace of home price gains has slowed but outright declines have mostly been limited to regions that may have gotten a little overheated during the pandemic.

Keep in mind, while a more widespread decline in home prices might help pull down headline inflation eventually, there is also a risk that a major downturn could usher in a recession as consumers watch their home equity sink closer to zero.

Data to watch

There is also always the risk of fallout spreading across other financial markets. The FHFA House Price Index, the Case-Shiller Home Price Index, and New Home Sales will all provide updates on the housing market today. Richmond Fed Manufacturing and Consumer Confidence are also due today.

On the earnings front, Advantest, Cintas, Concentrix, Jefferies Financial, Paychex, and Vail Resorts are all scheduled to report.