Determining the bottom of the bear market is much easier with hindsight than doing it in real time. That’s because the stock market (SPY) delivers plenty of impressive bounces that give the illusion that the worst is over…just before you hit even lower lows. Price action is therefore a tricky way to determine the bottom. Which brings us back to fundamental attributes like what’s going on with inflation and the economy to determine our path forward. This will be at the heart of our discussion in this week’s commentary.….
Please enjoy this updated version of my weekly commentary.
Determining the bottom of the bear market is much easier with hindsight than doing it in real time. That’s because there are plenty of awesome bounces that give the illusion that the worst is over…just before you sink to even lower levels.
Price action is therefore a tricky way to determine the bottom. Which brings us back to fundamental attributes like what’s going on with inflation and the economy to determine our path forward. This will be at the heart of our discussion in this week’s commentary.
The truth is that it is very difficult to assess the bottom from the price action alone. Just look at the bottoming process of past bear markets to show how difficult it is to undo it. And why investors are so often drawn into “gatherings of dummies“before the true bottom is found.
This brings us back to an exploration of the future outlook for the economy and what this means for stock price valuations.
Because economy down > earnings down > PE levels down > stock prices MUCH LOWER.
Right now we really look like we’ve entered a recession. Technically speaking, this happens when you have 2 consecutive quarters of negative GDP.
Well, the first quarter was surprisingly bad -1.6% which many investors gave up on because the early second quarter projections looked pretty healthy.
But far too many subsequent economic reports have fallen well short of expectations and now the Atlanta Fed’s GDP now estimate has fallen to -1.2% for the current quarter. So, barring a miracle, we are already in the middle of a recession.
It is the image of here and now. The key is what happens in the future. That’s why next we have to think about the Fed’s uphill battle against inflation.
Plain and simple, the Fed got inflation wrong. For a long time they said it was transitory and did nothing. Now they are coming to the rescue TOO LATE and thus increasing rates at the fastest rate in modern history.
Full awareness of this mistake is what has investors fearing that the Fed will gladly negotiate a recession to keep inflation under control. So the correction that started in January and was confirmed as bearish in mid-June was actually a good reading of the worrying tea leaves.
All signs pointed to a deepening recession and tougher action from the Fed until we got a welcome sign of relief on the inflation front.
I’m talking about the very timely decline in commodity prices which is quite evident in the year-to-date commodity price chart below.
This easing of inflationary pressures (including lower gas pump prices) is the primary reason it’s been 3 weeks since exploring the bear market lows. In fact, today marks the second consecutive time the S&P 500 (SPY) has closed above bear market territory (3,855), with some wondering if this bear market is indeed over.
The equation to explain this end of the bear market logic is:
Reduced inflation > Less aggressive Fed > Less damage to economy > Soft landing > Shallow bear market > Bull market returns in H2.
Sounds good, right?
This is plausible and definitely everyone’s favorite outcome, as we all appreciate bullish markets rather than bearish ones. Unfortunately, the likelihood of worsening economic conditions makes more sense with lower lows en route.
Consider this. Like an economic expansion and a bull market, it is a long-term process that takes time to unfold. The same goes for a recession and a bear market.
We are only 6 months away from this process which takes an average of 13 months to work its way to the bottom. At this point, there are already too many things in motion that will cause additional negative effects. Namely job losses.
Reity, you must be kidding. The government jobs report came out today and it showed a lot more jobs added than expected. You have to smoke something funny to see a problem here.
As shared with you many times before, employment is a lagging indicator. Sort of like a smoke alarm that goes off AFTER the house has already burned down.
However, there are cracks in the foundation for jobs if you look at other key reports. For example, weekly jobless claims increased almost every week for 3 months. Any subsequent reports closer to 300,000 claims per week will be a real wake-up call for other investors.
Next come the monthly Challenger Job Cuts reports which show the evolution of the number of layoffs announced in companies. The June report announced on Thursday was 58.8% higher than the May report with a note that read:
“Employers are beginning to respond to financial pressures and slowing demand by cutting costs. Although the labor market is still tight, this tension may begin to ease in the coming months”
This means that the wheels are in motion so that employment is the next domino to fall. And that equation goes like this:
Job loss > lower income > lower spending > deeper recession > lower corporate profits > lower stock prices
To be clear, I am open to the possibility that the moderating inflation picture could win out, leading to a white flag for this bear market.
However, given my background in economics and over 40 years of observing its interrelationship with the stock market (SPY), the much smarter money is rolling in the collapsing recession…and the coming bear market. also collapses.
What to do next?
Currently, there are 6 positions in my hand-picked portfolio that will not only protect you from an upcoming bear market, but will also lead to significant gains as stocks fall.
This strategy fits perfectly with the mission of my Reitmeister Total Return service. That being to provide positive returns…even in the face of a roaring bear market.
Yes, it is easy to make money when the bull market is in full swing. Anyone can do it.
Unfortunately, most investors don’t know how to generate gains while the market is falling.
So let me show you the way with 6 trades perfectly suited to today’s bear market conditions.
And then, later on, we’ll take our profits on those positions and start fishing the bottom for the best stocks to rally as the bull market makes its rightful comeback.
Come discover what my 40 years of investment experience can bring you.
Plus, get immediate access to my full portfolio of 6 timely trades that are poised to excel in this tough market environment.
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I wish you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
Publisher, Reitmeister Total Return & POWR Value
SPY shares closed at $388.67 on Friday, down -$0.32 (-0.08%). Year-to-date, SPY is down -17.56%, versus a % rise in the benchmark S&P 500 over the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the company, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, plus links to his most recent articles and stock picks.
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