Bear Markets End When No One Cares
The Fed says growth must slow to fight inflation... But we're not in a recession – yet... The market loved it... Bear markets end when no one cares... A four-step plan for spotting a real bottom... A buying opportunity outside the U.S...
And the beat goes on...
Over in Washington, D.C...
The Federal Reserve announced its latest policy move this afternoon – raising interest rates by 0.75% for the second consecutive month. Afterward, Fed Chair Jerome Powell addressed a room full of reporters in the traditional post-announcement press conference.
And once again – after reading a bunch of formal statistics from pieces of paper – he offered up uncertain assessments on the economy and often conflicting opinions on the same topic once real people started asking him questions... especially on the subject of whether the U.S. economy is in a recession.
First, Powell was asked whether he agrees with the White House that "we won't be in a recession." The chair's statement that seemed to say no, that tough economic times are inevitable to crush inflation...
We think it's necessary to have growth slow down. We need a period of growth below potential... We think it's probably necessary if we're going to get inflation down to a path to 2%... We're going to be focused on getting inflation back down.
Responding to the very next question, though, Powell started with a curious statement... seeming to realize the potential problem with what he had just said.
We're not trying to have a recession and we don't think we have to.
Next, he said the U.S. economy wasn't in a recession, but then he avoided a question about the second-quarter gross domestic product ("GDP") number coming out tomorrow, projected to be negative... then downplayed it, saying it would likely be revised anyway.
Someone then finally asked essentially, "Why should we believe you when you said inflation was 'transitory'?" Powell qualified himself even more, saying...
I don't think it's likely that the U.S. is in a recession now.
OK. But, hey, how's that "soft landing" coming along? Will thousands or millions of people lose their jobs as the Fed raises interest rates – which he said could keep happening for the rest of the year – to maybe cool inflation?
"Well..." he said, and paused. What came next, frankly, doesn't matter... All in all, what you need to know is that it's more of the same. Inflation is at historically high levels, and the economy is slowing down – and it's likely to continue. The Fed will see to it.
Whether you label it a recession or not is up to you.
We'll have a little more on what the Fed said (and did) tomorrow. For now, the most important thing might be that the central bank acted how the market expected, hiking its benchmark lending rate to a range of 2.25% to 2.5% for the first time in years to address inflation and not breaking any unexpected news.
In perverse market land, stocks popped after the announcement...
The tech-heavy Nasdaq Composite Index rose 4% today, and the benchmark S&P 500 Index climbed almost 3% higher. But, remember, these major indexes are still down 24% and 16% year to date, respectively.
This brings us to another idea we want to talk about today... It's something to keep in mind as more and more people start to say we might be near a market bottom. This is one of those timely yet timeless pieces of advice...
Bear markets end when no one cares...
If you've followed along here the last few months, I've said we're interested in spotting a market bottom. We're not necessarily interested in pinpointing the precise day, but like everyone else, we want to get close.
If we get pretty confident that one has arrived, that would be a terrific time to load up on high-quality stocks at cheap prices... or to otherwise get overwhelmingly bullish with our strategies again.
But we're not there yet...
That's the word from our colleague Brett Eversole, who detailed a "script for the looming market bottom" in the latest issue of True Wealth... Existing subscribers to the newsletter and Stansberry Alliance members ought to check it out.
Here's one reason we're not there yet... We sense a lot of people are seeking a market bottom today, if mainstream financial media is any indicator. And as Dan Ferris explained on Friday, that's not typical of behavior for actual market bottoms.
At true market bottoms, few people want to touch stocks even if they're sitting on a giant pile of cash. Brett quoted a section of the March 2020 True Wealth issue written by his mentor Steve Sjuggerud to explain...
I have experienced a lot of major bear markets firsthand. I have seen many markets fall – dramatically. I have seen the cycle of fear you are experiencing now in the financial markets. Many times.
I could talk to you today about interest rates, or economics, or other similar historical events. But to me, this is all you need to know...
The stock market will not bottom when it is all over the mainstream news.
It won't. It can't.
The bottom only arrives long after that... when the stock market falls out of the news completely... when most people have forgotten about Wall Street. Until that happens, stocks can continue to fall.
Longtime readers of Steve's work and Stansberry Research also know his thesis has been to find stocks that are "cheap, hated, and in an uptrend." But in a bear market, the "hated" part doesn't quite work, in part because the trend is down, Brett says...
That's because hated sentiment is a feature of bear markets. It's always there. It has to be, as prices fall and wealth evaporates. And that means hated sentiment alone isn't good enough to call a bear market bottom.
What we really want to watch for isn't hatred toward stocks... it's indifference.
That was Steve's takeaway in March 2020. If stocks are still in the mainstream news, fear is still ruling the day. Once that stops happening, we've moved on to indifference.
We're not there yet today. Looming economic turmoil and falling stock prices are very much dominating the news. Once that stops, stocks have a chance to bottom.
At market bottoms, you typically see "capitulation"... folks simply giving up all hope that they can ever make money in the stock market. We may be seeing that in the crypto space, but definitely not in stocks.
People are still debating if or how things will get better...
When will inflation peak? Hey, did you see gas prices are going down? We're all saved!
That's a fine and admirable approach to have in daily life, but it might not be the best in a stock market that has been trending downward for seven months. As Brett explained in this month's True Wealth...
The only trend that matters now is the long-term trend.
We're in a bear market... As I explained earlier, the S&P 500 and Nasdaq are still trading below their long-term trends, specifically their 200-day moving averages... though lately they've punched through shorter-term, 50-day moving averages.
But as we've also explained before, the last several bear markets have had some big short-term "relief rallies" within them... and these rallies have tended to get bigger as time goes on... with the biggest coming closer to the ultimate bottom.
Brett showed the S&P 500's behavior during the dot-com bust and the great financial crisis. The index had many rallies before hitting bottom, which happened later than most people imagined.
On the back end of the dot-com bubble, the S&P 500 rallied six times... by 8% and 9% at the start and then 21% twice closer to the bottom. In the financial crisis, U.S. stocks had five rallies, the last of which led to a 24% gain.
Brett used the following chart to show why we could be in the early stages of similar behavior today...
If you're short-term trading, you might actually want to hop on board some of these rallies and then "sell the rip," as I mentioned earlier this week. Doing so isn't the easiest thing to time, though... You want to follow someone like our Ten Stock Trader editor Greg Diamond.
And, anyway, if you have a horizon of anything longer than a few weeks, stay suspicious of these runs higher... That doesn't mean there aren't targeted opportunities you can buy today – many Stansberry editors continue to find the best ways to put your money to work even in these conditions – but it's not the time to get full-fledged bullish yet.
Check out the latest issue of True Wealth for more great detail. In contrast to the simple opinions or hunches you'll hear from many folks, Brett shares a concrete four-step plan for spotting a real market bottom. Anyone can follow it.
He covers each piece one by one, and by the end of reading it, subscribers have a great game plan to follow. And all that said, Brett offers up a buying opportunity in a group of stocks outside the U.S. where billions of dollars will flow in the coming years.
If you don't yet subscribe to True Wealth, click here to learn more about how to get started today for 75% off the regular price.
'It's a Lie'
Stop saying the U.S. dollar is strong, says Mark Yusko, the founder and CEO of Morgan Creek Capital Management. Yusko tells our editor-at-large Daniela Cambone that "it's a lie"... and that the dollar is going to lose its reserve-currency status.
Click here to watch this episode right now. And to catch all of the videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.
New 52-week highs (as of 7/26/22): Booz Allen Hamilton (BAH), Centene (CNC), and Covenant Logistics (CVLG).
In today's mailbag, feedback and a request stemming from yesterday's Digest... What's on your mind? Let us know with an e-mail to feedback@stansberryresearch.com.
"First, thanks for all of your great Digests...
"Walmart's profit outlook is some of their own doing from personal experience. A huge part of their business is now selling online. They have started making it so you can't buy quite a few items they used to deliver, but now say that you have to pick them up, crippling older folks that have to stay home. Also, they've tried to copy Amazon and apply third-party sellers that try to sell some of those items at huge, exorbitant prices.
"Many times, you've mentioned about inflation killing us. I wouldn't understand this if it wasn't for the education, I get from you folks.
"The Fed won't cure inflation by raising interest rates since they keep on digitally inflating the money supply. The 500+ people in that big round building are writing checks we the people can't cover. Looking at a U.S. Treasury note the way these people are handling the economy and the stability of those notes, if I were to treat them like looking at a stock for the beta to see what the volatility is in this case, a Treasury note would be 50.85%, something that nobody would think about buying." – Paid-up subscriber Jeff B.
"Corey, Please publish the 10y/3m spread chart formatted same as your 10y/2y chart was. It might be an interesting comparison. I can't recall the 10/3 ever being referenced before. [I'm an] Alliance Member – best investment I've ever made." – Stansberry Alliance member K.G.
Corey McLaughlin comment: Here you go. This is the 10-year/3-month Treasury yield spread chart for the past 40 years... with gray shading indicating "official" recessions...
For reference, here is the chart we shared yesterday of 10-year/2-year yield spread over roughly the same time period. The available data here start five years earlier...
What I noted is that when the 10-year/3-month spread has inverted for a sustained period in the previous five decades, a recession followed on average 12 months later... Nine months (before the pandemic) was the shortest lead time and 15 months was the longest.
That's a bit of a narrower "recession forecast," for lack of a better word, than if you follow the 10-year/2-year inversions. Since 1955, recessions have followed anywhere from six to 24 months after these initial inversions.
That makes sense to me, given we're talking about 3-month yields being more of a short-term indicator than 2-year yields, compared with the same 10-year yield. So, you can look at the 10-year/3-month as more of a warning.
It beats listening to central bankers.
All the best,
Corey McLaughlin
Baltimore, Maryland
July 27, 2022