This Is What an 'Oil Shock' Feels Like

The 'consequences' are here... Protect your hay while the sun is down... Oil prices, recessions, and bear markets... This is what an 'oil shock' feels like... About the yield curve... Protect your portfolio now... A brief bear market survival guide...

Today, we're seeing the consequences...

Of the unprecedented amount of stimulus thrown into the global economy over the last two years... Of longer rock-bottom interest-rate policies from the world's central banks, artificially juicing stocks and other asset prices...

Of a pandemic that most of the world, frankly, hasn't handled well at all... And now of a war – whose scope is yet unknown – that has quickly rattled the already-fragile global recovery picture.

Unfortunately, it's all coming home to roost before our eyes...

It feels to me (Corey McLaughlin) like panic is gripping the markets today.

It's not quite the "circuit breaker" panic of March 2020 when the onset of COVID-19 tanked stocks quickly, but it's close... and maybe it is only a bit more orderly because many stocks and other risk assets have been selling off for weeks and months now...

We couldn't say exactly when or how the quickest bull market recovery in history would fizzle out...

But we have said to prepare for the party to inevitably end... and it might take less than many people think to "turn off the lights"... although war, widespread inflation, and parabolic oil prices certainly do the trick.

With everything going on in the world and markets today, I want to reiterate this message...

Our founder Porter Stansberry is fond of saying "make hay while the sun shines," meaning make money while the market allows it... If you want to grow your wealth, this is wise advice to follow.

The flip side is true too... When the conditions aren't favorable, you want to protect your hay overnight... and make sure it's sheltered from any storm that might arrive.

If you have followed the Digest regularly, you might already be familiar with this concept... especially if you are a longtime subscriber or one of our loyal Stansberry Alliance members.

In short, there are times to be aggressive... and times to be cautious... And they usually occur when most people feel like they should be taking the exact opposite approach in the markets.

But emotions can get the best of even the most experienced investors – and I don't think many people had a potential World War III and record high inflation following a two-year global pandemic on their 2020s bingo card...

So I think it's worth repeating sound, timeless advice from our editors today... because as our colleague Mike DiBiase wrote yesterday, and I'm paraphrasing... things could get worse from here before they get better...

In today's Digest, I'll explain more about why, I'll share what several of our editors are saying today, and I'll suggest a few simple moves to consider in order to protect your wealth today... and, most important, to position your portfolio for bigger gains in the long run.

We'll start with the unique feature of today's market... one that was squarely in the news today with President Joe Biden announcing a ban of Russian energy imports in response to that nation's invasion of Ukraine. That's the price of oil...

Today, Brent crude oil, the international benchmark, traded near $130 per barrel... and West Texas Intermediate was not far behind at roughly $125. These prices are about 80% higher than they were at the start of December.

This is what an 'oil shock' feels like...

Plain and simple, whenever oil prices have been this high, a recession has followed...

Even before Russia invaded Ukraine, oil prices had been steadily rising for reasons we've described several times. But now they've spiked... So have other commodities like wheat, a global staple crop, and aluminum and palladium – key elements in auto manufacturing...

But let's just focus on oil. Market analyst Jim Bianco, who gives macroeconomic guidance to institutional investors, shared this chart and comment on Twitter the other day... when oil moved higher than $100 per barrel. He said...

Not every recession is led by a 50% rise in crude. But every 50% rise in crude has led a recession.

Is this time different? We hope so...

But hope is not a strategy...

It doesn't take a lot of thinking to realize the added expenses that will reverberate through the economy... and eat into corporate growth and the pockets of people on Main Street.

This is why every major "oil shock" has preceded a recession. They were surprise hits to economic growth.

We already are experiencing record-high inflation that hasn't been seen in decades – and it may continue, no matter what the Federal Reserve does. This is what we've been concerned about for months: "stagflation" at the least, as we wrote in January.

Some market analysts estimate that about 50% of the price of each gallon of gas is directly influenced by the price of crude oil. The average price at the pump in the U.S. is already at an all-time high ($4.17)... and increased fuel costs could add up to thousands of dollars for the average American.

There goes at least one stimulus check...

Moving on, an 'inverted' yield curve also typically predicts a recession...

Mike talked about this just yesterday, so I won't go too deep other than to say I haven't come across a more reliable, more frequent predictor of an upcoming recession than the "inverted" yield curve... I'll explain what this means in a moment for anyone unfamiliar.

It's not a perfect indicator, like the oil signal above might be, but it's close enough that you might feel compelled to put some hay inside the barn... An inverted yield curve has preceded the last eight recessions, going back 60 years, including the brief COVID-19 recession...

I explained why most recently in the January 10 Digest, when we were watching the yield curve move...

In plain English, the yield curve is the difference between short-term and long-term interest rates in the bond market...

You can measure this curve in a variety of ways... but the most common is the difference or "spread" between the 10-year U.S. Treasury notes and the two-year U.S. Treasury notes.

Most times, long-term rates are higher to compensate investors for the trouble of tying up their money for a longer period of time. This is healthy... and logically, it makes sense.

There's more uncertainty in the long term.

But when that relationship flip-flops, and you can get a higher rate on shorter-term bonds than longer-term ones, the yield curve is said to have "inverted." It doesn't happen often...

But when it does, it warns that trouble is ahead for the U.S. economy.

Because it means enough people are betting that bond risk in the short term is greater than the long term... and that can lead to some wild outcomes for the economy and stocks.

There is a lot of money in the bond market and it's considered a "safe haven" asset, so when bond traders get nervous, it says something about the markets and economic sentiment in general.

In January, we were watching the yield curve as it was "flattening," which wasn't bad in the short term for stocks, but which could be troubling in the long run if the curve gets closer to inverted.

We're getting pretty, pretty close...

As Mike wrote in yesterday's Digest...

The chart below shows a favorite measure of a yield-curve inversion... the "10-2" Treasury spread. This is simply the yield on 10-year Treasurys minus the yield on two-year Treasurys.

When the number falls below zero (red arrows), a recession always follows...

Today, the 10-2 spread is just 24 basis points (a basis point is one-hundredth of 1%)... You can see that the spread has been falling since the middle of 2021.

Today, a day later, the 10-2 spread is another basis point lower, at 23.

The thing is... history has shown that recessions don't happen immediately after a yield-curve inversion... nor is it an immediate "sell" signal for stocks either.

Longtime readers know that history shows stocks have typically peaked several months to as long as two full years after the yield curve first inverts.

And while bull markets have typically continued for well more than a year after the yield curve inverts, there have been two notable exceptions...

In 1980, stocks peaked just two months after the yield curve inverted. And in 1973, the market actually peaked two months prior to the first inversion.

At the very least, a yield curve flirting with going upside down is not a sign to expect a raging bull market anytime soon ‒ quite the opposite. Inverted yield curves come before recessions and...

"Bear markets" typically coincide with a recession...

Let's talk about what this could mean for stocks – and when...

In May 2019, our colleague Dr. David "Doc" Eifrig published his "Bear Market Almanac" for Retirement Millionaire subscribers. Existing subscribers and Alliance members should read it here. Hopefully you did already, as Doc wrote then...

I suggest you tuck this issue away for further reference. Your less-informed friends will be glad to receive the wisdom you share when they are panicked, and you are well-prepared.

As part of it, Doc and his team analyzed the relationship between yield-curve inversions, recessions... and bear markets, which first requires a definition of what a "bear market" really is.

This idea is worth considering today because we sense you're going to hear more bear market discussion everywhere soon. As Doc wrote...

If you rely on Google or trader lore, you'll find that a bear market is when stocks decline by 20% or more.

But if you start fiddling with charts or spreadsheets, you'll find that popular definition to be worth little. After all, is it only 20% from an all-time high? That's not very useful in a period like the one after 2009, when stocks took nearly a decade to reach new highs.

In spirit, we want to define a bear market as "a period of prolonged negativity in the stock market, of such a magnitude that you'd like to have a plan in place to prepare for it."

Doc said simply, if the market drops far, fast... or takes a lesser decline but over a sustained period, then that's a bear market.

Then he shared the details of his yield curve/recession/bear market analysis and provided plenty of data to support his conclusion. As Doc wrote...

Does the yield curve predict recessions and bear markets? It's not a good sign. When we see a recession, it's likely that it was preceded by a negative yield curve. However, the yield curve also gives a lot of false signals.

Here's what we can say for sure... If the curve inverts and lasts for at least a couple weeks, a bear market tends to come in the next few months. A recession follows a few months after that.

According to Doc's analysis, for example, the yield curve was inverted for 247 days from December 2005 to June 2007. A recession occurred in December 2007, two years after the curve first inverted... The start of the coinciding bear market lagged by 21 months.

But the bear market associated with the dot-com-bubble-era curve inversion – which might be more relevant to today – happened much quicker, just one month after the curve inverted in February 2000. Stocks peaked a month later.

Bottom line: Make sure your portfolio is in order – and protected today...

Our colleague Dan Ferris made this point in his recent interview with our editor-at-large Daniela Cambone – in which Dan shared how to prepare your portfolio from a crash and inflation... Watch it here.

Are you willing to bet on 10% upside for 80% or more downside? That's the way Dan sees the market... In those terms, the risk-reward might not be worth it today... and you'd be wiser to consider his inflation-protection recommendations instead.

Now, there are arguments to be made that certain tech and growth stocks might have already reached a bottom – Meta Platforms (FB), Nvidia (NVDA), and Netflix (NFLX), for instance, are down about 50% from their previous highs.

But many other stocks have not fallen that far yet. I'm generally an optimistic guy, but being optimistic right now might call for stocks not to fall much further than they already have.

Last week, our colleague Dr. Steve Sjuggerud updated his True Wealth Systems readers and recommended they step aside from U.S. stocks. As Steve wrote...

Our computers see too much risk in the short run, so we're stepping aside for now.

This might come as a surprise to people who know Steve only for his bullish "Melt Up" thesis but knowing to step aside is simply part of smart risk-management.

Doing this can do three things: lock in gains (Steve's readers closed a 94% gain on U.S. stocks)... protect your existing capital from potential future losses... and allow you to take advantage of rare buying opportunities that will also inevitably present themselves...

To this point, on Thursday, Steve recommended a strong buy on a gold play, which – a reader points out in today's mailbag – was already up more than 30% in just two trading days.

Steve said there will be a time to come back in from the sidelines and start buying U.S. stocks, but it is not that time. He said a "strong sign" to buy will be when stocks regain their January 3 highs...

That will mark the end of today's correction. And it will mean a new rally is underway.

The other [strong sign] will be a new buy signal from our TWS computers. Once our systems give us the green light again, we'll know it's safe to re-enter the trade. Until then, we need to remain disciplined investors.

The U.S. market isn't the only one struggling. Many domestic sectors and global markets are in sell mode.

In fact, 11 of our 15 U.S. sector systems are in sell mode. And 15 of our 18 global markets are flashing "sell."

The overall message in equities is clear... Now is the time for caution.

A brief bear market survival guide...

You're probably thinking, well, what the heck should I do now? I can't give you personalized advice... nor do I necessarily want to. What's best for you is based on your goals, timeline, risk tolerance, and what you want to do with your money.

But we can offer a few general pieces of advice for anyone interested in surviving a bear market. And make no mistake, you want to first survive a bear market...

Remember rule No.1, don't lose money.

Of course, we want you to make gains in stocks, and grow your wealth, but we also want you to be mindful of eye-popping valuations... and own a truly diversified portfolio that will protect your wealth no matter the market environment...

Own high-quality stocks that can continue to reward shareholders – and have "pricing power" to deal with inflation. Stick to your stop-losses if prices fall... And don't be hesitant to raise cash or tilt your allocations more toward a "chaos hedge" like gold.

Gold – which rises in relative value as everything else, priced in fiat currencies, loses its value – has been doing its job lately, rising 15% since January 28.

In the model portfolio of our flagship Stansberry's Investment Advisory, for example, a pair of gold companies were up 22% and 14% over the previous month, as of Friday's publishing date, buoying the long-term portfolio...

The S&P 500 Index was down 3% over the previous month, but the overall Investment Advisory portfolio was up around 1% on average. As our team wrote in the latest issue...

We own crisis hedges in our portfolio for times like these... Think of them as insurance. When the markets are in turmoil, these hedges protect your portfolio from downside.

Owning these hedges is a form of risk management. It lets us be comfortable holding onto many of our other positions without stop losses... like our Software as a Service ("SaaS") recommendations.

Thanks to our hedges, we can suffer short-term losses in these positions without jeopardizing our overall portfolio.

This is real-time risk management... and these are the ideas we would want to hear today if our roles were reversed. Just like over a year ago when we said we didn't want anyone to be caught off guard by high inflation, we don't want anyone to be surprised if stocks fall further from here. We'll be back with more tomorrow.

New 52-week highs (as of 3/7/22): Altius Minerals (ALS.TO), DB Gold Double Long Exchange-Traded Notes (DGP), Franco-Nevada (FNV), Freehold Royalties (FRU.TO), SPDR Gold Shares (GLD), Hershey (HSY), Lockheed Martin (LMT), McCormick (MKC), Mosaic (MOS), Northrop Grumman (NOC), VanEck Vectors Oil Services Fund (OIH), Sprott Physical Gold Trust (PHYS), Royal Gold (RGLD), Rayonier (RYN), Suncor Energy (SU), United States Commodity Index Fund (USCI), Utilities Select Sector SPDR Fund (XLU), and SPDR S&P Oil & Gas Exploration & Production Fund (XOP).

In today's mailbag, feedback on yesterday's Digest by Mike DiBiase warning of a recession later this year... more kudos for our colleague Dan Ferris... and a note about big, early open gains on Dr. Steve Sjuggerud's latest True Wealth Systems recommendation, which we urged subscribers and Stansberry Alliance members to consider in Friday's Digest... Do you have a question or comment? As always, e-mail us at feedback@stansberryreseaerch.com.

"I have been investing primarily in gold stocks for the last year because I believed that inflation was coming. You have done a great job of explaining what is happening and I believe your predictions are spot on." – Paid-up subscriber Robert T.

"Dear Mike, I quite agree with what you say. You might want to take a look at data from the Center for Financial Stability, specifically these data, prepared under the guidance of Steve Hanke of Johns Hopkins. You may have followed some of his work. Here, he computes money supply following the monetary aggregation principles of François Divisia.

"Not a well-known economist in modern times, he developed a concept of weighted money, i.e., not all money is the same ‒ M1, M2, and what used to be M3 just add up all types of money; he weights different types of money based on how easily it can be spent.

"Steve is an old friend of mine, and we talk about this quite a bit. The bottom line is that Divisia M4 [a broad aggregate, including money-market securities, CDs, and Treasurys] and Divisia M3 [which excludes some money-market securities] have exploded since March 2020. Even more than the St. Louis Fed numbers.

"I anticipate that we will see an aggregate inflation of 35% based on current monetary aggregates. And if the Fed keeps printing, it will be even higher. So we are just 1/4 to 1/5 of the way to our new price level...

"Even if the Fed reduces M3 or M4, it will never do it fast enough. And if it does it aggressively, we will have stagflation. Either way (stagflation or growth with inflation) there will be 'flation' in the lexicon.

"Put differently: You. Are. Correct." – Stansberry Alliance member Jonathan A.

"Dan, I don't have much to say but just want to thank you for your persistence of telling your customers what you would want to hear.

"I guess I'm of a similar mindset as you, probably why I was willing to pay $1,500 for a lifetime subscription. I've been following all your comments and podcasts... Just want to say thanks." – Paid-up subscriber Al M.

"Dr. Steve and his team's latest recommendation at True Wealth Systems is up 31.4% after two trading sessions. Those computers at True Wealth Systems were outstanding with this recommendation." – Paid-up subscriber Michael S.

All the best,

Corey McLaughlin
Baltimore, Maryland
March 8, 2022