Be Careful Making U-Turns, Please

'We have listened'... The U.K. government reverses course... Be careful making U-turns, please... Bond yields pull back... The U.N. wants the Fed to 'pivot'... Is a new 'bear market rally' afoot?... Don't buy the dip just yet...

'We get it, and we have listened...'

These were the words from new U.K. Prime Minister Liz Truss today. She was announcing that the government was making an abrupt U-turn on its plans to cut taxes for high earners... amid, you know, an inflation and energy crisis for the entire population.

The British pound crashing to an all-time low... mortgage lenders pulling loans off the table... the Bank of England essentially bailing out leveraged pension funds that were dumping long-term bonds to meet margin calls... and enough public outcry and opposition finally forced the new government to reconsider the plan.

The decision to "reverse" happened sometime in the past 24 hours.

As recently as yesterday at a political conference in England, Truss appeared to throw her finance minister, Kwasi Kwarteng, under the bus... In a media interview, she said the tax cuts were his idea – but that her government would push ahead anyway despite the market chaos.

By this morning, though, the message changed entirely...

Truss tweeted today that the government would drop its proposal to bring the tax rate down from 45% to 40% for Brits making more than £150,000, or roughly $170,000...

That all sounds well and good, though the story was more than a "distraction."

It was – and still is – indicative of just how fragile the state of one of the world's largest economies is... a bad first impression for new leadership... and an example of a full-fledged currency crisis.

So, today, the U-turn was taken as 'good news'...

By the markets, at least.

We've written frequently in the past few months about how bond yields have been rising. On balance, they're responding to the new reality of higher inflation... and a higher-interest-rates-for-longer environment settling into the markets.

Since yields trade inversely to bond prices, this change meant that folks' "safe" government bonds have been eroding in value right alongside stocks. This has crushed the conventional 60/40 stock-bond portfolio...

I (Corey McLaughlin) am always hesitant to chalk up one day of general market movement to one specific story. But the U.K. government's U-turn and Band-Aid stuck on the British pound crisis – for now – didn't hurt the action today.

As Stansberry NewsWire editor C. Scott Garliss told us in a private note, the news appeared to show up in the bond markets "in most developed nations" today...

The yield on 10-year U.S. Treasurys is back below 3.7% compared to the recent intraday high of 4.01% on September 28...

At the same time, the major stock indexes also rallied today, with the U.S. benchmark S&P 500 up around 3%... The energy sector led the way, up 6%, as oil prices rose based off news that the OPEC oil cartel is considering reducing supply.

That's a whole other story for another day, perhaps tomorrow...

For now, just know we are living in a year when stocks and bonds have fallen in tandem... and we're now also talking about a scenario where stock and bond prices are going up together during a rally on "good news."

Any knee-jerk reactions today to the U.K. developments are likely based on two things...

1. The worst-case scenario of "contagion" stemming from the U.K. economy has been tabled for now, given the reversal in policy that triggered the currency crisis and easing of short-term fears.

2. More investors have decided that the sort of backtracking on the "inflation fight" that we've seen over the past week from the Bank of England (pausing quantitative tightening) will ultimately happen elsewhere – like the U.S. – if they face similar situations.

About that... here is something we did not expect to see today, but which does not necessarily surprise us now that it has happened...

The U.N. wants the Fed and central banks to 'pivot' now...

Just today, we heard the loudest call yet for a central-bank "pivot," and not from people on social media. This call came from a United Nations agency. In a statement with its annual report published today, the United Nations Conference on Trade and Development said...

Excessive monetary tightening could usher in a period of stagnation and economic instability...

Any belief that [central banks] will be able to bring down prices by relying on higher interest rates without generating a recession is... an imprudent gamble.

Imprudent gamble? Those are policymaker fighting words.

The U.N. report was titled "Development Prospects in a Fractured World," and it said higher interest rates would have a more severe impact on emerging economies. And that's true, given the stronger relative value of the dollar and other major currencies.

This report is actually in line with a lot of what we've said this year... in a few ways.

First, we've chronicled how a relatively stronger U.S. dollar isn't likely to make other governments or policymakers around the world very happy, as it devalued their currencies more than ours... I even quoted an example from Bangladesh last month to this point.

Second, there are things the Federal Reserve and other central banks can do to lower inflation. Higher interest rates obviously influence the real estate market, for example, with higher mortgage rates lowering demand among would-be buyers.

But central banks can't do much about oil prices or whether corn or wheat makes it on ships around the world... which this U.N. agency apparently sees. So, it thinks central banks should stop raising rates now.

The head of this particular U.N. agency – Secretary-General Rebeca Grynspan – told reporters today that central banks "must change course." As alternative ways to fight inflation, she suggested taxing corporations, improving regulation, and redoubling efforts to reduce supply-chain bottlenecks.

In any case, we haven't seen any screaming signs of a change from the Fed yet... Fed Chair Jerome Powell, in fact, is doing all he can to keep telling Wall Street the plan remains the same – raising interest rates to fight inflation – even if the economy is slowing.

That story hasn't changed. It might, in which case we'll be looking at a world with higher inflation. But so far, the U.S. and global economies are still staring down the same challenges they were a week ago.

So, be careful putting too much stock in today's rally – or at least take it for what it might be...

Is the next 'bear market rally' afoot?

That's the question on the mind of our Ten Stock Trader editor Greg Diamond... and likely a few of you today. We're referring to a short-term move higher for stocks within a longer downtrend – a feature of bear markets.

As regular readers know, Greg correctly identified the "top" for stocks back in January and has been recommending mostly bearish bets to his subscribers all year long.

I say "mostly" because there have been a handful of instances that Greg has suggested look ripe for a "bear market rally" – and a strong enough one that might make for short-term bullish trades.

As Greg wrote to his subscribers in his Weekly Market Outlook today, it might be about that time once again. He wrote that the recent low is looking like one that "we can trade"...

I know this is probably a surprise for many Ten Stock Trader subscribers... We've been trading from the short side of this bear market for much of 2022.

But as you know, the relief rallies within the bear market can rise sharply. Remember, I have no bias... I trade based on time and price.

Without giving too much away to be fair to paid subscribers, Greg said that based on the indicators he's following, the new lows in stocks we've just seen "may not last much longer."

Now, this might sound like conflicting information, given I just said the story of the markets hasn't changed. But, first, Greg also said he'll be watching the markets this week closely before giving any fresh, actionable advice of a bullish bent...

There's plenty of economic data coming out this week with the employment figures on Friday being the most important. So this week could be crucial for the market.

I'll provide details on what to watch and when to anticipate a low in my daily updates this week, but we're close.

Second, as I always like to say, Mr. Market doesn't necessarily care what we think. It has a mind of its own.

Just because 40-year high inflation hasn't budged significantly yet... and although overhanging war concerns in Eastern Europe are still very present... and while stocks might still be overvalued... that doesn't mean everyone agrees or shares our agenda for building long-term wealth.

In other words, that's why bear market rallies can happen.

Existing Ten Stock Trader subscribers and Stansberry Alliance members can check out Greg's Weekly Market Outlook today for more detail. He also posted a follow-up "game plan update" today here.

At the same time, stocks aren't as beaten-down as they were before this summer's rally...

And that means if we do see a bear market rally, it might not be as strong as the last one...

Our colleague and DailyWealth Trader editor Chris Igou wrote to his subscribers today that the number of stocks in the S&P 500 making new yearly lows is significantly less than the number that were making new 52-week lows back in June.

The S&P 500 rallied 18% from there. We'll call that the Fed "pivot" rally. It ended in mid-August during Powell's Jackson Hole speech, and the U.S. benchmark is now back around its previous June low.

Maybe we'll end up calling this one the "U.K. avoided a credit crisis" rally or the "U.N. pressure" rally... who knows.

Whatever the case, as Chris points out, if there is to be any kind of rally, there might be some more downside before the U-turn is clear, and you might not want to expect as strong of a surge this time around should one come. As he wrote today...

The recent sell-off hasn't been as bad as the one leading up to the June rally when you consider "market breadth." That's a fancy way of saying the pain isn't as widespread as it was then.

One way to measure this is through the number of stocks in the S&P 500 that are hitting new lows.

When only a few stocks are hitting new lows as the broader market falls, that shows us the bleeding isn't that bad. Only a handful of stocks are taking the brunt of it.

But when a high number of stocks hit new lows during a crash, the pain is pulsing through the market.

That typically happens near the end of a big sell-off. And when the whole market is feeling the agony... that's when relief follows.

Near the June low for the major U.S. indexes, more than 40% of stocks in the S&P 500 were at a 52-week low. Today, only 21% of companies trading in the S&P 500 are at yearly lows. As Chris said...

There are plenty of stocks that can fall lower before we see another relief rally in the broad market. And we are far away from a major bottom based on these numbers.

All in all, Chris advised subscribers that he's going to be "very selective" before recommending new trades and will be using a combination of reliable indicators to identify any buy signals in major U.S. sectors.

Until then, he warns, "Don't buy the dip in the S&P 500 just yet."

We'll end right there, since it's probably the most important message we can share today. Be careful making U-turns, please.

The End of an Artificially Low-Rate Era

In a conversation with Stansberry Research senior analyst Matt McCall, Peter Boockvar – chief investment officer at Bleakley Financial Group and editor of The Boock Report – shares his take on stocks and commodities like gold as the market enters a new interest-rate era.

Click here to watch or listen to this episode right now. And to catch all of Matt's shows and more videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.

New 52-week highs (as of 9/30/22): short position in iShares Russell 3000 Fund (IWV).

In today's mailbag, feedback on Dan Ferris' latest Friday essay... and yet more thoughts on the Federal Reserve... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Dan Ferris, Your email Friday was great, as usual... Your stock market forecast in January made me conservative. I sold most of [my] stocks down to 1 share of 60 stocks, and bought hedges to offset declines.

"Most days I have small overall gains. So, I have been able to not lose money. When this is over, I will buy back these stocks." – Paid-up subscriber James S.

"Dan, Boy, you nailed it on the head on this one. I invested in one of these things a long time ago (like 15 years) and guess where my money still resides? Yep, still there, stuck in the fund and don't expect it to ever come my way again. Fortunately it was a small enough amount that I don't have to lose sleep over it. These things are the most stinking pile of garbage ever offered to the public. Hopefully Wood won't be able to lure anyone to invest in this crap." – Paid-up subscriber Brian E.

"Is Cathie Wood the great granddaughter of PT Barnum? I've added ARK Venture Fund inflows/outflows to my leading-indicators dash board with alert set at <1.0! Thanks for the idea." – Paid-up subscriber Jim H.

"Thanks, Dan for a dose of realism in this strange world of political and economic madness." – Stansberry Alliance member Wayne S.

"Raising interest rates is NOT a good thing for the Fed. The Fed has some very serious and complicated problems on their hands.

"Thanks to politicians and decades of mismanagement, the national debt is now unserviceable. With every one percent of increase of the interest rates, the payment on our national debt goes up exponentially. And to get inflation down to the Fed's target of 2 percent, the Fed is going to have raise interest rates to 6 or more percent. Paying 6 percent interest on borrowed money to pay the interest on the national debt is going to cause serious consequences for the Fed and all politicians now in office.

"So the only thing the Fed can do now is play the tough guy, hammer home the vision of raising interest rates high and hard and pray it scares the hell out of the economy and inflation retreats very soon. Because if the Fed has to pay those high interest rates on the national debt for a long time we are on the road to the highway to hell." – Paid-up subscriber John M.

All the best,

Corey McLaughlin
Baltimore, Maryland
October 3, 2022