Making Sense of the Mess
The market is sending mixed signals... A 'dislocation' in the growth outlook... Making sense of the mess... The weaklings will get knocked off eventually... What you can do... Don't miss Marc Chaikin's outlook tomorrow night...
The churn continues...
As our Ten Stock Trader editor Greg Diamond put it in his Weekly Market Outlook this morning for his paid subscribers...
Let's not mince words... The price action across the stock market is a mess right now.
Indeed. On the surface, there appear to be a lot of mixed signals – and returns – in the stock market right now...
The small-cap Russell 2000 Index – which has a substantial weighting to financial stocks – has been trading near a yearly low and is flat since the start of 2023 after dropping roughly 7% in the days after the Silicon Valley Bank run...
Meanwhile, the tech-heavy Nasdaq Composite Index is up 13% since New Year's Day. Enough investors (or speculators) are getting giddy at the thought of potential Federal Reserve rate-hike cuts later this year, which many folks are sure would boost growth prospects.
In the middle is the benchmark S&P 500 Index, up roughly 4% year to date and trading just above its 200-day moving average (200-DMA), a technical measure of a long-term trend. Then the Dow Jones Industrial Average's performance makes things even messier, down about 2% for the year and trading just below its 200-DMA.
If you're wondering what to make of the markets today, you're in good company... I (Corey McLaughlin) will explore what investors appear to be weighing right now... and what it might mean for your portfolio.
Wise words while watching swim class...
Over the weekend, David Cervantes – the founder of New York's Pine Brook Capital Management and a prior guest on our Stansberry Investor Hour – typed out a great series of Twitter messages while watching his son's swim class.
He discussed a "dislocation" in the markets about economic growth in the rest of the year. It's a topic that speaks to the leading uncertainties in the market today, like whether we'll have a recession and what the Fed will do if that happens.
To start, David pointed out that the Atlanta Fed GDPNow forecast is estimating 3.2% annualized growth of U.S. gross domestic product ("GDP") for the first quarter of 2023. Another indicator he looks at suggests 2.4%, so for the rest of his argument's sake, he settled on the market expecting 2.8% GDP growth for the first quarter...
Meanwhile, in its projections that it published just last week, the Fed's official forecast for "real" GDP growth for the entire year is 0.4%. This raises a bunch of questions, as David said...
In order for us to even come close to that Fed forecast number, GDP must come in negative for the remaining 3 quarters of the year. Roughly -.5% GDP. Every quarter. For the next 3 quarters...
He said he's not so sure that will happen – particularly because of the slowdown we've already seen from past rate hikes and the state of the labor market today – though it could...
We can twist ourselves into knots to say yes it does [happen], but that assumes some pretty crazy stuff. From 2.8% to -.5% in 1 quarter is some borderline sudden stop kind of stuff. With a labor [market] that is white hot. Fine. It can happen.
Then ask yourself, what's the Fed's reaction function to a sudden stop kind of event? Is that reaction politically tenable?
We can dance around in circles to validate or invalidate the Fed forecast according to our biases. But that doesn't matter.
What matters is the disconnect between implied growth and realized growth and the subsequent impact on asset prices.
If we don't have a sudden stop, the chances of growth just downshifting as described above are slim. That means growth is under priced. It means the Fed is right regarding no rate hikes in 2023.
It means the yield curve is likely to violently reprice if realized growth comes in higher.
On the other hand, David wrote, a sudden slowdown would likely "pack a bigger punch" that leaves the U.S. economy with worse than 0.4% real GDP growth for the year. If this is the case...
It means the Fed forecast is full of beans and the [market] is over optimistic. It means the Fed needs to be cutting yesterday.
Weighing the possible outcomes...
There's a camp of investors, which has been growing larger if you look at the bond market, that is betting on rate cuts from the Fed in the second half of the year... These investors think inflation will continue to decelerate and things will get substantially worse for the economy as the lag effect of the central bank's rate hikes hits the real world.
These folks don't believe Fed Chair Jerome Powell when he said as recently as last week that the central bank isn't even considering rate cuts right now... They're betting on a Fed "pivot" before the Fed has indicated it will happen.
On the other hand, say the Fed does what it says it will do and holds its benchmark lending rate near its "terminal" rate of around 5% for the rest of the year. (That's also what it projected last week.) The Fed will be able to do that because there hasn't been a full-fledged crisis that needs an emergency response of a rate cut...
In that case, the Fed's projected economic slowdown probably also won't have materialized, considering the GDP projections for the first quarter we're seeing today. In other words, forget "hard landing" or "soft landing"... This will be like "a landing," and a world of higher interest rates and the consequences that come with that.
In sum, David wrote...
None of what I am saying is a forecast. I am pointing out a glaring discrepancy between official and market forecasts, and what the biggest macro aggregate (GDP) that is staring us in the face is telling us in real time.
This is the sort of thing that many really savvy investors say...
They spot a discrepancy in the market, weigh the possible outcomes of it, and evaluate what investments might benefit or suffer in those cases. Then they make bets accordingly, or don't make any bets at all if the reward isn't worth the risk to them.
So what should you do?...
Well, first, as always, you need to know why you're investing in the markets in the first place, and what your goals and time horizon are. Are you betting money you need in six months or six years from now? You'll probably do things differently depending on your answer. Start there before doing anything else... Only after that can you make appropriate decisions.
Aside from that, here's my view as I sit here looking at the market in late-March 2023: It's certainly not a raging bull market, but it's not looking like last year's loud, roaring bear market either, when anything and everything with a dollar sign attached to it was down across the board.
There are some signs of optimism, mainly given the continued declining pace of inflation that looks like it's going to continue...
As our Stansberry NewsWire editor C. Scott Garliss shared with us today, recent Fed surveys on "prices received" by manufacturing businesses that have been a leading indicator of the consumer price index ("CPI") continue to decelerate from last summer's peak...
All in all, this is good news... The backdrop of decelerating inflation has been a constant for months. (Note, I'm not saying that this means there is no inflation. There will be so long as we have fiat currency. But it has been rising slower than it had been for the past two years.)
The question, however, is what kind of knock-on damage we might see as a consequence of the Fed fighting the inflation war. There is also a good amount of justifiable fear, too, given the regional banking panic we've just seen... concerns of a credit crunch... and broad weakness in the labor market potentially ahead.
If you believe the Fed that the economy is going to have little growth this year, it's likely going to happen with a recession in the second half of the year. But as David suggested, if that kind of slowdown doesn't materialize (which it hasn't just yet) and the Fed is wrong (always a decent bet), that means growth may be "underpriced" today.
However, some growth and tech stocks have run up recently to even pre-pandemic valuation levels...
If that's all enough to make your head spin, here's a suggestion...
If you ever needed another reason to own the type of high-quality companies that many of our editors typically recommend, this scenario we're looking at today is one of them. Nobody has a crystal ball.
But, in the end, not all companies are going to thrive or even survive in a serious recession or a higher-interest-rate world... even if the type of brutal recession many folks expect never quite arrives.
Heck, some banks couldn't even survive the early days of higher rates, even one with a Fed regional board member as its CEO. (That's Silicon Valley Bank, by the way, which we just learned today is being taken over by First Citizens BancShares.)
In times like these, there are and will be buying opportunities – if you know where to look – along with sectors and names to avoid. You don't need to be "all out" or "all in."
You're not going to go wrong owning shares of companies that generate tons of free cash flow and can reward shareholders and continue to grow their businesses... These are businesses that have strong balance sheets and sell always-in-demand products.
On the other end, staying away from the duds of the world can just as much save your portfolio, too, from big losses. If a recession doesn't clip these names first, a higher-rate environment will eventually spoil their fortunes – especially the "zombie" companies of the world that can't even afford to pay the interest on their debt today.
One way to separate the winners from the losers...
It pays to have help in an environment like this. That might mean heeding the advice of editors and analysts you already follow... or perhaps looking at a valuable tool like the Power Gauge that our friend and Chaikin Analytics founder Marc Chaikin created about a decade ago for individual investors.
Marc put together everything he learned from four decades on Wall Street into an easy-to-use tool. The Power Gauge from our corporate affiliate Chaikin Analytics analyzes thousands of stocks, with a simple "Bullish," "Bearish," or "Neutral" rating that can be applied to individual names, sectors, indexes, or exchange-traded funds ("ETFs").
Some niches, Marc says, have quietly turned bullish lately.
Marc will share more details in his free presentation at 8 p.m. Eastern time tomorrow. Attendees will also hear his outlook on the markets today and what he thinks about the ideas we discussed today on the Fed, growth versus recession, and the best places he believes to invest in right now.
As I mentioned last week, Marc predicted the possibility of bank runs four months ago, the only person I saw make that prescient statement. So, if nothing else, you ought to consider what's on his mind today in addition to seeing how he likes to pick winners and stay away from losers.
His event tomorrow night is totally free. We just ask that you sign up in advance. You can do that right here.
Preparing for the Rolling Run-Up
Here's a sneak peek of what Marc plans to talk about tomorrow night. In this recent episode of Making Money With Matt McCall, he talks about what he sees going on in the current environment, various sectors, and his recommendations for positioning today...
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
New 52-week highs (as of 3/24/23): Alamos Gold (AGI), Activision Blizzard (ATVI), SPDR Bloomberg 1-3 Month T-Bill Fund (BIL), Copart (CPRT), Hershey (HSY), Novo Nordisk (NVO), and iShares 0-3 Month Treasury Bond Fund (SGOV).
Our mailbag is full with your feedback on Dan Ferris' latest Friday Digest. We'll share some notes today and continue with more tomorrow... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"I very much agree with the Friday Digest and Dan's prediction for [central bank digital currencies ("CBDCs")]. I have suspected this was the case for the last three years. The main question now (and it is one I have pondered a lot), is what to do about it, knowing this is the direction.
"As Dan mentioned, I have started using cash as often as possible, but trying to set up to protect one's wealth under those conditions is a tricky puzzler. I would love to see more coverage in the near future on what ways Dan, and other Stansberry analysts see as the best protections in this type of scenario.
"Thanks for all the great coverage." – Paid-up subscriber Amy M.
"Thank you Dan Ferris. I am so often completely aligned with your positions. You hit this one out of the park. Keep having the courage to point out the Emperor's lack of apparel. We are in deep trouble and headed for worse. Meanwhile, Nero fiddles." – Paid-up subscriber Chuck P.
"At the end you write: 'I don't know that I'll stay in this rabbit hole long enough to think about all the implications of that. But after reading Werner's article, I am now sitting here thinking maybe I should do more business in cash.'
"You might add: 'and buy some heavy military hardware.'" – Paid-up subscriber K.M.
"Dan, I think you just wrote the most important essay of your career..." – Paid-up subscriber Ransom G.
"Dan Ferris is pure genius! I could be his dumber brother. Love following him at Stansberry Research and Twitter. His analysis and understanding of current governments is spot on!" – Paid-up subscriber T.D.
"THANK YOU, Dan Ferris. It's about time someone at Stansberry started warning of CBDC... I have wondered more than once if what's been happening from COVID, to money printing, to inflation, to bank problems was all planned. I agree completely with your assumption, it's on purpose. It's part of the plan for total control.
"Like you said, it started with COVID. They learned that the public can be controlled like a herd of sheep with the proper scare tactic. It's only a matter of time before the Totalitarian governments of the world take complete control of our lives." – Paid-up subscriber J.L.W.
Dan, If your postulation is true, that a crisis is being created, what are the ramifications of this? What can we do to prepare for the possible outcome? Perhaps we will get a CBDC. What else could happen in an economic crisis? Yes, COVID lockdowns are a great example of what people are willing to do in a crisis. (Manmade or not.)
"I have noticed that a crisis, particularly natural disasters, can bring out the best in people; people willing to help strangers with whom they have no historical connection and will likely not receive anything in return. As a praxeologist, this runs counter to homo sapiens day to day way of acting. Could this mean there is hope for us sapiens? We certainly are endlessly creative.
"Your interviews and writings add a unique and important dimension to Stansberry's material. My best to you." – Paid-up subscriber Chaz B.
"Dan, I too read that article and was amazed by what Dr. Werner was saying. There were a number of links, but the most telling was when he referenced Blackrock in the middle of the article.
"The following sentence has a link to a Blackrock letter that spills the beans... 'The Fed knew this would create inflation, as Blackrock later confirmed in a paper which stated that 'the Fed is now committing to push inflation above target for some time.'
"Put your tinfoil hat back ON!!! It's real!!!" – Paid-up subscriber Don B.
All the best,
Corey McLaughlin
Baltimore, Maryland
March 27, 2023