The Stock Market Doesn't Care Right Now

Everything looks like it's getting worse... The stock market doesn't care right now... Will the climb up the 'wall of worry' stop?... What could come next... A solution for any outcome...

It's not looking good...

The weather is beautiful outside my window right now, but every piece of economic data I (Corey McLaughlin) look at on the computer screen on my desk tells the same depressing story...

The U.S. economy is grinding to a halt. More and more Americans have higher and higher levels of debt (and Uncle Sam does, too). Inflation is still high. Banks' lending standards are tightening. And a recession has all but been made "official."

On those chipper notes...

The stock market doesn't seem to care too much...

Even with a pair of slight down days yesterday and today, the benchmark S&P 500 Index is up about 8% since the start of the year and roughly 15% since its October lows.

As our Ten Stock Trader editor Greg Diamond wrote to start the week, stocks keep climbing the proverbial "wall of worry" that prices tend to scale in bull or bull-ish markets...

This has held true for decades, across different economic cycles... and it also applies today. You see, bull markets do a good job of ignoring negative sentiment... And, of course, there will always be skeptics.

The sources of "worry" usually vary from one bull market to another. Together, the following "bricks" have built up a rather large wall in 2023...

• U.S. banking crisis
• Russia-Ukraine war
• Persistent inflation
• Interest-rate hikes by the Federal Reserve
• China's military aggression toward Taiwan
• OPEC's oil production cuts
• Technology sector layoffs (the most since the early 2000s)

I'm sure we could add a few more "bricks" to this list. The point is that the "wall of worry" is palpable among investors.

Yet Greg said, based on his research and analysis, he expects the S&P 500 to hit new all-time highs later this year...

As we've shared recently, other folks at Stansberry Research like Dr. David "Doc" Eifrig expect higher stock prices, too... We shared last month that Doc and his team saw that "markets have proven resilient" and that stocks were nearing a "reversal window."

Senior analyst Brett Eversole also wrote to you earlier this year explaining why he thinks we've been in a cyclical bear market within a longer-term secular bull market... We're reminded of something that Brett's mentor, longtime True Wealth editor Steve Sjuggerud, has said often...

Stocks tend to move much faster than the economic environment. They anticipate what's coming. That means stocks are the first to fall during tough times... And they often rally before the economy even begins to recover.

In the meantime, bears keep wondering when the charge up the Worry Wall will stop...

As regular Digest readers know, Dan Ferris is among those who don't believe we'll get out of the biggest bubble of all time as easily as a bear market that bottomed in October... He is forecasting a bigger drop followed by a long sideways market.

The inevitable question most people will then ask is, "Who's right?"

As I've written before, the answer is it doesn't really matter... The most practical thing is how you manage your portfolio in line with your goals and time horizon for your investments... and use our editors' and analysts' recommendations to fit them.

As Dan likes to point out, he has portfolios of open buy recommendations in his newsletters – The Ferris Report and Extreme Value – but also thinks it's critical to have portfolio insurance as well in the event of a major downturn.

Still, let's indulge and explore the more satisfying answer anyway...

What comes next?...

First, let's look at what has happened lately.

Even with all the volatility we've seen over the past year-plus amid "bottom watching" and "Fed-pivot hoping"... the war in Ukraine... and maybe the most widely expected recession in history, the S&P 500 has been flat since February... and August... and June... and last March...

Now that it really looks like a recession is just starting to happen – both in corporate earnings and on Main Street – will that materially change investors' attitudes enough for another leg down for stocks?

We've said before that over history, the stock market tends to "price in" a recession well before it actually happens. As our Director of Research Matt Weinschenk wrote in the January edition of our Portfolio Solutions products...

The market leads the economy. Stocks are priced on expectations. So 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.

This certainly appeared to be the case throughout 2022 as the stock market started selling off last January as Fed tightening became imminent... and the consequent economic slowing that would happen because of it.

After the pace of inflation appeared to finally peak, stocks started taking off again last October, though definitely not in a straight line.

Then to start this year, the "animal spirits" started to awaken again. Tech stocks and small caps outperformed on apparent expectations of eventual Fed rate cuts later this year. The market expected the economy to get into a situation that demanded the Fed's help... even if inflation was above the central bank's much-sought-after 2% goal.

Indeed, the Fed could give in by the end of the year...

There is increasing evidence that it will. Fed officials are hearing stories from business owners about economic conditions worsening...

As our Stansberry NewsWire's Kevin Sanford reported today, the Fed's Beige Book – published eight times a year with anecdotes that central bank officials are told from businesses in their regions – included the following point...

The report noted that lending standards are tightening and consumer spending was, at best, flat. This confirms a plethora of recent economic data that showed serious signs of an economic slowdown over the past month.

In recent earnings calls, leaders at big banks have said they are starting to see more people fall behind on their credit cards and loan payments. As we wrote Monday, credit-card and debit-card spending are also showing signs of heading toward "negative growth" land.

Expectations are still for the Fed to raise its benchmark lending rate by another 25 basis points at its next policy meeting in early May, bringing it to its projected "terminal" rate of this hiking cycle. From there, nobody really knows what is most likely to come next...

But we will offer these two possibilities...

The Fed can cave in its inflation fight when the "pain" in the economy becomes too much, and inflation never does go back down to 2%... Or it can keep encouraging the economy to stagnate or shrink to the point that inflation turns into deflation and unemployment spikes, killing our higher-prices nightmare of the past two years while resetting the economy.

This brings us to today...

Even after several mismanaged regional banks failed last month and several other risks hit the markets, stocks are still up over the past six months. This is telling behavior on its own.

Yet the risk of more downside ahead is still there, too. We don't need to look very far in the past to see an example... Regional bank stocks cratered amid the run on Silicon Valley Bank – and dragged the small-cap Russell 2000 Index, which has a lot of exposure to financial stocks, down with it by about 10% in a few days.

If something new "breaks" in the system, we could see similar behavior in the associated areas. For instance, as consumer debt piles up and delinquencies are likely to follow, I can't stop thinking about the number of car loans and trendy "Buy Now, Pay Later" plans that folks will default on.

If you own a diversified portfolio...

In the most recent editions of Portfolio Solutions this month, senior analyst Alan Gula offered up a great summary of the economy and markets today, and how to think about positioning a well-balanced portfolio. He wrote...

The Fed is providing liquidity to the banking system. And the situation now looks to be stabilizing. On top of that, inflation is easing, and this rate-hike cycle is nearing its end. These are reasons for optimism.

But there's still cause for concern as well...

As banks retrench or raise capital, credit conditions are going to get tighter. The turmoil in the banking system increased the likelihood of a severe recession. At the same time, a hard landing isn't a certainty.

That's why we must manage our risk and prepare for more challenges ahead... all while holding the stocks of fantastic businesses and looking for opportunities to invest in others at good values.

If short-term trading is your thing, have at it, but know the risks... And over the long run, own shares of high-quality businesses, ignore the trash, and consider inflation protection. And keep cash on hand, too, for the buying opportunities that will present themselves.

New 52-week highs (as of 4/19/23): CBOE Global Markets (CBOE), Copart (CPRT), DraftKings (DKNG), McDonald's (MCD), Madison Square Garden Sports (MSGS), NVR (NVR), Flutter Entertainment (PDYPY), Stryker (SYK), West Pharmaceutical Services (WST), and Zimmer Biomet (ZBH).

In today's mailbag, feedback on yesterday's Digest about the inevitability of the debt ceiling "debate"... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Ah, for the good old days before 2008, when an annual deficit of more than $300 to $400 billion was unthinkable!!!" – Paid-up subscriber Kelly F.

"Hello all, I wanted to share something with y'all. My parents received the stimulus checks. I think maybe 2 of the each. So together it was something like 2.5k. So they got cash. When I did their taxes, the stimulus checks were something like a tax credit, so they got another dip in the pot with a tax check for another 2.5k. So, if I remember correctly, the stimulus package came out to around 1.5 trillion. Now the debt ceiling is off by 1.5 trillion. Could it be from less taxes coming in from the stimulus tax credit? I'm sure my numbers aren't exact, but it does raise the question that the stimulus was a double dip and the bill is now due. Just thought I would toss that out there." – Paid-up subscriber David G.

All the best,

Corey McLaughlin
Baltimore, Maryland
April 20, 2023