- SPY closes lower on Tuesday as inflation fears mount in Europe.
- Nasdaq and Dow also close lower on Tuesday but only modestly.
- Bond markets once again are the center of attention.
SPY ETF news
Welcome to the world of QT, quantitative tightening. The biggest US bond market buyer in history has now turned into a seller as of today, June 1. Modestly at first, but we still feel financial markets are underestimating the impact of the Fed flip. The backstop is gone, and yields are free to roam higher. The latest US consumption data confirmed the worst case – consumers are largely using savings to spend and cope with higher prices. This has a limited lifespan. However, by doing so, it means the demand side of the inflation equation will hold up for longer, meaning more inflation or at least longer-lasting inflation. That necessitates higher Fed rates. So a 2023 recession led by overly aggressive Fed tightening in the face of huge stimulus savings flowing into spending is now looking more likely.
Also this week we had an exorbitant German CPI reading, and the bond market in Europe is now looking at the potential for a 50 basis point interest rate hike by the European Central Bank. Bond markets in Europe have moved aggressively to the downside (prices down, yields up) and this has once again given risk assets a jolt. Overall, we expect US spending and US GDP growth to remain strong into the year-end, but 2023 is looking increasingly cloudy. Financial markets are forward-looking, so equity markets will remain challenged and in a bear market. That is our current base case.
All this means more losses are likely, and we initiated coverage on Apple (AAPL) and Tesla (TSLA) this week with some eye-catching price targets. $400 for Tesla and $100 for Apple. Tesla needs no introduction to the overvalued argument, but our Apple number is already generating some comments.
Please check them out and give us your feedback. This is the latest addition to our equity market coverage: high quality in-depth research with investment bank-style valuation methods.
SPY ETF forecast
The rally has now extended to $415 but failed twice. We still feel a breakthrough is likely, but technicals are prone to take a back seat to Friday's employment report. Equities really need it to be very poor. The only hope in our view for the equity market is a sudden slowdown in the US economy with a resulting fall in yields. Otherwise, yields simply have to keep rising and risk assets falling. Bear market rallies, however, are historically in the region of 10%, so there is more upside here. We feel the more likely endpoint of any rally is at $435. Failure here at $415 would actually be more negative in our view and lead to a quick retest of the $380 Fibonacci retracement of the pandemic low to high. March 2020 to January 2022.
SPY ETF chart, daily
The author is short Tesla.
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