A Bull and a Bear Walk Into a Market...

Something for everyone... A bull and a bear walk into a market... A friendly reminder... The stock market leads the economy... Even if you think a recession is coming, it's time to buy... The big question that remains...

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Bulls and bears are in a fight...

Look at the markets and you'll see it...

Since the start of the year and going back to the most recent broad market low roughly four months ago, the bulls have mostly won. The benchmark S&P 500 Index is up about 8% since New Year's Day and 16% since its mid-October low, when Wall Street decided inflation had peaked.

And recently, we've seen a series of so-called "golden crosses." That's a funky technical-analysis term for when an index or stock's short-term trend, measured by the 50-day moving average, breaks above its long-term 200-day moving average.

Federal Reserve Chair Jerome Powell poured some fuel on the fire last week with an optimistic-sounding news conference, saying inflation was starting to come down. Bulls took this to mean the Fed would soon stop hiking interest rates, largely ignoring Powell's comments that inflation likely had a long way to go before returning to "normal" levels...

Bears – or anyone else more hesitant to jump back into U.S. stocks – are still waiting for more confirmation that the major trend has changed. They're wary that this is another "bear market rally."

That's understandable. After all, the long-term trend lines of the major U.S. indexes are still headed down and to the right. And the past two trading days have felt like most of 2022 did...

The S&P 500 is down almost 2% since Thursday's close, and bond yields have popped higher to what they were about a month ago. Bond yields are showing signs of a "double bottom," as our Ten Stock Trader editor Greg Diamond wrote today, which could portend higher yields ahead (and new bad news for stocks).

The yield curve is also still heavily inverted – traditionally a strong indicator of recession ahead...

The 10-year/2-year Treasury spread – a good benchmark to follow – is still at negative 0.77% and hasn't "bottomed" yet. The last time this spread was this inverted and still falling, like now, was in April 1981. That's three months before a year-plus recession "officially" began and the unemployment rate hit almost 11% in November 1982.

On the surface, these may look like mixed signals...

There's something for the bulls and the bears to see...

The bond market is bearish and is saying "recession ahead," while the stock market is up over the past four months. Indeed, I'm also seeing some signs of classic bull market behavior in U.S. stocks, like sector rotation, strengthening market breadth, and prices "climbing a wall of worry."

But we also see challenges ahead for the economy, and risks like job losses, sticky parts of high inflation, and, of course, surprises... like a Chinese spy balloon "accidentally" catching the jet stream and coasting over a U.S. nuclear-research facility in Montana, which could escalate tensions between the world's two largest economies.

But as we'll explain today, concerns about the economy ahead are normal – and to be expected. What's more, it's also totally normal for stocks to rise despite these same concerns.

A friendly reminder...

This is as good a time as any to remember one of the most important investing lessons out there: The economy is not the stock market, and the stock market is not the economy.

If you're paying more attention to your money because you're worried about recession ahead, or just want some more to think about as bulls and bears battle it out, this is a worthwhile thought to explore right now...

Importantly, as we'll show, it also means neither the bulls nor the bears are completely right.

Our friend and colleague Jeff Havenstein, an analyst on Dr. David "Doc" Eifrig's team, wrote a great piece last week about these ideas in Doc's free Health & Wealth Bulletin. As Jeff wrote...

The economy and the markets don't move in tandem. And a lot of market watchers don't understand this...

Contrary to what many casual investors might think, you don't want to buy stocks when the economy bottoms. And you don't want to sell stocks when the economy is at its peak. You want to think ahead instead, as Jeff said...

The best investors don't focus on what the market or a particular company is doing today... They focus on what is going to happen.

Markets are priced on expectations.

We've seen that recently with fourth-quarter earnings... Shareholders care more about guidance (what management predicts will happen with their company) than they do actual earnings and revenue numbers.

This is why, as an individual investor, you want to buy or sell stocks or any other asset before the story has fully played out, not after. Don't chase the headlines.

The stock market leads the economy...

This is also why the bond market can be warning of recession ahead at the same time stocks are rising. Jeff shared a visual of this big thought, which comes courtesy of the January edition of our Portfolio Solutions products...

A bottom in the market will come before a bottom in the economy. Here's a stylized chart of how you should think about it...

Unlike the economy, the market doesn't move because of stats or figures. It moves because the great mass of investors has willed it to.

A lot of people expect a recession now...

Conversely, a year ago, this was only starting to become the case...

Our director of research Matt Weinschenk delved deeper into this topic in Portfolio Solutions last month. First, he talked about how more than 60% of economic forecasters, according to Bloomberg, are predicting we'll see a recession in the next year.

This number was less than 20% when the stock market peaked back at the end of 2021 and the start of 2022. Stocks led the economy... or expectations for what would happen with the economy.

Now, the mood is flipped after a year-long bear market. Matt also shared another indicator from the Federal Reserve Bank of New York that turns the yield curve into a probability of recession in the next 12 months. It's around 38% today.

Based on history, those are some good odds. Every other time the New York Fed's indicator has hit such a high peak, we've seen a recession either immediately before or immediately after...

And financial media hosts no longer ask for predictions of a recession like they did all through 2022. Rather, they presume the recession is coming, and the conversation is about how long or how deep it will last.

Still, nobody knows for sure. As we're seeing, the jobs market – aside from mounting layoffs in the tech industry so far – is holding up quite well. The unemployment rate just hit a new 53-year low of 3.4% on Friday, and the pace of inflation has slowed.

As Matt continued...

In my economics training, I was taught that predicting recessions is difficult, if not impossible. As a 2019 paper from the Federal Reserve Bank of Philadelphia explains...

Economists cannot predict the timing of the next recession because forecasting business cycles is hard. For example, at the onset of the 2001 recession, the median forecaster in the Survey of Professional Forecasters expected real U.S. gross domestic product ("GDP") growth of 2.5% over the next year, while in reality output barely grew. Again, on the eve of the Great Recession, forecasters were expecting GDP to grow 2.2% over the next four quarters, and we all know how that worked out.

In other words, when everyone readily accepts a prediction about the future as easy or obvious, it probably isn't.

Today, everyone thinks a recession is coming. In turn, since the market is priced on expectations, we could actually be closer to the bear market bottom than anyone believes... fears of a looming recession be damned.

Said another way, when it seems like "everyone" agrees on one thing – like a recession coming – then it probably means those same people have already acted on that belief... like selling stocks in 2022. Once that has happened, it's time to move on to the next idea.

The big question that remains...

The future is uncertain, and 40% of professional economic forecasters don't see a recession ahead... It's not so obvious to everyone yet.

This might be why it looks like so many bulls and bears are battling today – and perhaps why U.S. stocks, while mostly up since October, are also flat when you look back further to points in May, June, and August 2022...

The big question still up for debate is whether the economy has hit bottom yet in its peak-and-trough cycle. Unless you have a time machine, you can't answer that question right now.

If factors emerge that suggest the economy will get worse than expected today – like the Fed raising interest rates higher than anticipated, to cite one plausible theory – then stocks could be due for another leg down.

A strong jobs market today is both good and bad... It means people aren't losing jobs, and an obvious recession is not at work yet. But it also means the monetary policy string-pullers may want to hike rates even more to cool inflationary pressures.

If that doesn't happen, the bulls could prevail... It's also possible that the bulls and the bears could be wrong, and we'll endure a lengthy sideways market.

For now, though, two seemingly opposed ideas can be true. Consider this...

The economy could get worse from here and stocks could go up...

As Jeff concluded, even if you think a recession is coming, it's time to buy...

Think about where we may be in the chart above... We're not at the economy bottom just yet. There's likely some more pain ahead as inflation is still elevated.

But we could be close to a market bottom since everyone agrees we'll see a recession...

Don't let recession fears keep you sitting on the sidelines. Again, markets are already pricing in a recession... Any positive news could start a rally in stocks, even if the economy has not bottomed yet.

We're not calling a market bottom, nor do we need to... Could this be one last "bear market rally" before another big decline? Sure, it could. The good news is that whether we face a downturn, sideways market, or steady uptrend... the solution for building the ideal portfolio is the same.

As Matt wrote in Portfolio Solutions last month, you always want to own shares of high-quality businesses that will reward you no matter what happens. He told subscribers they shouldn't be afraid to put some cash to work – but ought to be careful getting too aggressive just yet.

As you weigh decisions – now or anytime – always consider your time horizon...

In the short term, after a strong rally to begin the year, there are signs of the bulls winning too much lately and getting greedy...

For example, as Greg wrote in his Weekly Market Outlook in Ten Stock Trader today, we saw an all-time high in call options being bought last week. These are bullish options bets, and last week's activity eclipsed previous highs of November and January 2021.

Late last month, retail market orders as a percent of market value hit 23%, according to data from JPMorgan Chase. That's a smidge higher than early 2021 when GameStop (GME) trading first made mainstream headlines...

Greg wrote today that a pullback could be in the offing over the "next four to six weeks."

However, over the longer run, most (but not all) of the fears about a possible recession are likely already baked into stock prices. If that's your concern for staying on the sidelines, consider thinking beyond it.

It doesn't mean new concerns can't pop up from here... But that's true any time you invest in stocks. Right now, if you find a high-quality stock trading at a reasonable price, take the opportunity to strengthen your portfolio with long-term winners.

New 52-week highs (as of 2/3/23): CTS (CTS), Fortive (FTV), W.W. Grainger (GWW), Hologic (HOLX), MasTec (MTZ), Parker-Hannifin (PH), Stryker (SYK), and Trane Technologies (TT).

In today's mailbag, feedback on Part I of the annual Stansberry Research Report Card, published on Friday... A related housekeeping note: If you haven't seen the grade you're watching for, stay tuned for additional reports this week from our publisher Brett Aitken... And, as always, send your notes and questions to feedback@stansberryresearch.com.

"Hello Brett, I was not always a fan of Greg Diamond very early days but have since learned to respect not only his work-ethic but also his knowledge, passion and overall results. I have personally told Greg that I value his market analysis and Gann forecasts as much or more than his trade recommendations. While I did not completely get out of stocks in 2022 after his warning, I did decrease my holdings significantly and warned my family as well based on Greg's analysis. I am very happy I did as I have begun putting my dry-powder back to work and still have more to deploy soon.

"A lot of Stansberry's best work received poor grades for the year, which is understandable given the bear market we are in. I admit that I have never been a big fan of stop-losses but understand why you implement them with tens of thousands of subscribers.

"Greg has been able to reliably forecast large market moves since coming to Stansberry. What I would like to see is a blend of stop-loss strategy combined with Greg's Gann analysis/forecasts used to establish position sizes across portfolios when future macro conditions warrant or show potential large moves up or down. Perhaps doing so can establish a better risk/reward setup when clouds begin to form or the sun starts to shine.

"I remember Steve Sjuggerud writing more than once (paraphrase); People say you can't time the markets, but you must time the markets. I suspect that is why he and Brett Eversole created True Wealth Systems years ago.

"And why would anyone ignore the results of W.D. Gann, one of the greatest traders of all-time." – Paid-up subscriber Terry D.

All the best,

Corey McLaughlin
Baltimore, Maryland
February 6, 2023