In a Market That Lacks Clarity, Patience Is the Best Bet

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Stocks are indicated higher in the pre-market here on Thursday as we await more testimony this morning from Federal Reserve Chairman Jerome Powell, who testifies before the House today after dealing with the Senate on Wednesday.

Powell continues to hint at the possibility that interest rate hikes will push the economy into a recession but states that he is optimistic the economy is strong enough to withstand the pressure. The market appears to embrace optimism, but there is a constant battle between inflation worries and recession concerns.

This market has been dealing with some of the most difficult economic issues for many years. The transition is an extremely difficult one. The biggest problem for market participants is that it is impossible to accurately discount what the future may hold because it is so uncertain at this point. There are economists who are quite confident that a recession is on the horizon and that unemployment is going to increase quickly. There are already signs that housing is starting to slow, and they are still few indications that inflation is going to slow.

The economic challenges are daunting, but stocks have already corrected quite a bit. There is still a major disconnection between the indexes, which just recently fell into a bear market, and many individual stocks that have been in a bear market for over a year. There are a few signs of relative strength in the worst groups, such as biotechnology and growth, but it is transitory and the charts still need a few more weeks.

Market players always have a strong desire for certainty, and that leads them to make predictions. They want to have some control over the future, so they try to formulate a narrative of how things will develop. That is psychologically comforting, but predictions of this sort are seldom accurate.

Like many other market participants, I have a strong desire to want to be more active and do more buying but there just isn’t enough clarity right now to justify doing much. Charts need more time to develop, and we still have an extremely uncertain economic situation and no clue as to what degree we have discounted the worst.

Stocks will dance around again this morning to Jerome Powell, oil, inflation, recession worries and a variety of other issues, but this is a market that requires patience rather than strong convictions.