This Bear Market Could Go Lower
Editor's note: This bear market isn't going away anytime soon...
You see, investors have been selling off stocks all year as volatility floods the markets. And with no clear end in sight to the Russia-Ukraine conflict or the Federal Reserve's interest-rate hikes, many investors are looking for cheap buying opportunities with strong upside potential.
But Income Intelligence editor Dr. David "Doc" Eifrig says that any bargain buys you find right now could turn out to be fool's gold...
In today's Masters Series, adapted from the June issue of Income Intelligence, Doc warns against buying cheap stocks in hopes of a turnaround in the broad market... explains why high inflation is weighing on stocks... and reveals how folks can protect their wealth amid today's volatile market environment...
This Bear Market Could Go Lower
The first thing you need to know as an investor is how to get a feel for an asset. And the best recipe for finding the right assets to buy is to look for those that are "cheap, hated, and in an uptrend."
That's the mantra of my colleagues Steve Sjuggerud and Brett Eversole, who've been using it to guide their True Wealth advisory for more than two decades. Had they not created the phrase, we'd likely steal it for ourselves and repeat it to you every month.
This mantra works. It works for long-term investors... It works for short-term traders... And it's the best six-word summation of how to beat markets I've ever seen.
To be fair, you can cheat a bit on the first two. You don't always have to buy dirt-cheap. And you don't have to buy only when everyone truly hates an asset.
But the big one is the third factor. Ignore the trend at your own peril.
So with your cheap-hated-uptrend lens, how does this asset class look?
It appears to have come down from high valuations and has started to establish its trend upward.
Now we must admit we've employed a bit of trickery. Please forgive us. Because that is an inverted chart of the S&P 500 Index.
Does inverting the chart change your opinion? We find this to be a useful exercise.
Because as "bullish" as that chart is, it should make you think this looks more bearish...
And then there is the issue of inflation...
We are now watching the data differently. The inflation typically quoted in headlines is the Consumer Price Index ("CPI") change over the last 12 months. When you see in the July report that inflation is at 8.5%, that means prices today are that much higher than last year.
But that's not the number that's important today. Today, we want to know what inflation did over the past couple months, not the last 12. In July, prices remained unchanged after rising 1.3% in June and 1% in May. That's a lot.
So by thin-slicing inflation at that level, we get the unfortunate news that it's not slowing down much at all...
In June, prices were rising at a pace of 15.6% a year. That's not because of "base effects" like the numbers after the pandemic, which showed high values due to depressed prices in a shutdown economy – that demand was outpacing the supply of everything. Simple as that.
Inflation numbers seem to have always surprised everyone – except for readers of mine for the better part of two years.
And this high reading surprised the general public again. That's what has led to the ongoing sell-off in stocks, plus falling bonds as well.
Digging deeper into the inflation number, there's precisely one reason that should lead to fewer worries... and many that lead to more.
First, energy and food are a big part of inflation. A number that strips those costs out, called core CPI, only rose 5.9%. That's good news, in a sense.
Some consider it nonsense to view prices without including two of the most important things we buy. But it's not saying those prices aren't important, just that food and energy are often driven by their particular balances of supply and demand – and don't always reflect a broader price trend.
Still, this post-pandemic inflation boom has been led by consumers buying physical goods that were limited due to supply-chain problems. Inflation was mainly a goods problem... and that has started to ease...
But services inflation has been higher recently... dashing hopes that the transitory nature of the pandemic consumer would lead us out of inflation.
So to recap, we're trying to gauge the broad future of the economy on small ticks of data. That's not ideal for a long-term investor, but it's what a bear market forces on you.
And we're also waiting for the market's momentum to turn around and validate any feelings of optimism.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Editor's note: You don't have to wait on a market turnaround to rake in money. In fact, Doc is issuing a challenge to his readers to stop buying stocks for 30 days and use his "stock-free strategy" instead...
Doc has picked 132 consecutive winners for his readers using this strategy. It's effective no matter what's happening in the markets. And if you're not using it yet, you're missing out on the most successful strategies in the history of our firm. Click here to learn more.