Firstly, let’s address the elephant in the room: Tuesday saw almost $90 billion wiped off the market in a dramatic sell-off that saw the leading ASX 200 index give up 246 points (3.5%)

It was the worst day for the ASX 200 since May 2020, during the initial COVID crash, and the smaller end of the market wasn’t spared: The emerging companies index (ASX: XEC) was down 5.24% for the day, and the Small Ordinaries (ASX: XSO) finished the session 4.03% lower.

A return to trading on Tuesday saw a significant drop in the XJO as it played catch-up with a falling US market. The rapid sell-off saw the market drop below 6600 then trade around this level for much of the session.

Tuesday’s Implied Volatility jumped to 24.39% and pushed its IV rank higher to 82. Today the market’s implied volatility has eased back to 22.63% with an IV rank of 72, and the market has seen price action around the 6660 level.

A head and shoulders pattern precipitated this sell-off and there may still be a bit further to go on the downside eventually, with some support expected around 6360. On the way down, we also expect another support level around 6500. If the market rebounds, we see resistance around 6840 then 6940.

With RBA governor Philip Lowe warning that inflation may hit 7% by year’s end, higher interest rates appear a near certainty.

An even more pronounced situation is hanging in the balance in the US, where the S&P 500 has dropped back nearly 10% amid fears of a recession should the Fed raise interest rates aggressively to combat its own inflation – which now sits at 8.6%, its highest level in 40 years.

All eyes are now on the Federal Reserve’s rates call (due tonight) – most economists are predicting a 0.5% increase but a growing chorus of analysts are warning the central bank could go as high as 1% – potentially triggering a recession in the process.

Last week in this column, I discussed household spending rates after Reserve Bank governor Philip Lowe highlighted this data as something he and his colleagues would be using to assess the effects of inflation and rate rises going forward.

This week, I wanted to quickly touch on this again. Yesterday, amid all the chaos on the ASX, the ABS published its latest monthly household spending data showing spending for April 2022 was 7.6% higher than the previous corresponding month.

Furniture and household items saw the largest gains, but there were some notable increases in spending on hotels, cafes and restaurants too.

That likely puts spending in line with Lowe’s expectations for high consumption throughout the rest of 2022 – though as I cautioned last week, we don’t really know enough yet about how the Reserve Bank’s board will use these numbers to inform future policy to make any strong assumptions.

Separately, NAB’s business confidence index also came out this week and although it shows a dip compared with the previous month, it remains above the long run average while hiring intentions climbed to 10-month highs.

Business activity remains strong too, despite the change in government and ongoing inflation problem. The real question now is, how long will that last?

One investor who tries to look beyond short-term market swings like those we saw on Tuesday is Luke Winchester, managing director of Merewether Capital and CIO of its long-only, wholesale high conviction inception fund.

Luke will be joining us this Friday, 17th June, at 12pm (AEST) for The Insider: Meet the Fund Manager webcast, where he’ll explain why market fear and panic is causing investors to make irrational decisions and why keeping emotions in check is crucially important when markets edge lower. He’ll also discuss some of the key stocks in his portfolio that could be well placed to navigate the current economic environment. To join us for this session, click here.