Here We Go Again

A few big weeks ahead for the markets... Don't be fooled by the calm... Beware bear market rallies... Why earnings season matters... Inflation numbers on deck... The real deal about jobs... Here we go again...

Things are about to get really interesting (again)...

As I (Corey McLaughlin) will explain today, a stream of potential market-moving commentary and data is going to be published over the next few weeks that's worth paying attention to. Specifically...

1. Earnings season is about to start again.
2. Today marks the start of another "inflation week."

If recent history is any indication – and longer-term cycles, too, if you ask our Ten Stock Trader editor Greg Diamond – what we see over the next few weeks could say a lot about whether we've reached a bottom for 2022...

This week, we'll begin to hear more about the latest quarterly financial updates and outlooks from America's publicly traded companies... how they're dealing with higher costs and what they think about future prospects.

Typically, companies don't like to cut full-year outlooks until at least the second quarter (in the spirit of keeping things positive). That means if things are heading south, we might see more negative commentary from CEOs and company executives this earnings season than we did coming out of the first quarter.

And when I say "inflation week"... I'm referring, like I did last month, to the latest round of "official" monthly inflation data.

On Wednesday morning, we'll see the latest Consumer Price Index ("CPI"), which tracks prices paid by consumers. It will cover the month of June. On Thursday, the Producer Price Index ("PPI"), which does the same for producers, will also come out for June.

Wall Street will quickly parse these numbers in the context of three main questions: Has inflation "peaked?"... What do the data mean for businesses, the economy, and consumers?... And what might the Federal Reserve do in response?

And with another round of made-for-the-mainstream financial data coming up, the public and Wall Street analysts will confront the storylines we've talked about all year long – namely inflation and what it means to the economy – again.

Which means more volatility ahead...

I know it's summer and you probably feel like you deserve a break. But dry those beach or lake towels, wipe the sweat away, and listen up... This isn't the time to take a vacation from the markets, then look up in a month and wonder what happened.

The past few weeks have been calm...

In a relative sense, at least.

The tech-heavy Nasdaq is up 7% and the benchmark S&P 500 Index is up 5% since their most recent lows last month. But if you look below the surface and beyond a few weeks, you see that all is still not well...

For one thing, the market's "fear gauge" – the CBOE Volatility Index, or VIX – remains above average. This index, which measures options activity and sentiment, checks in today at 26 – roughly 6% higher from Friday.

We consider fear, which often translates into market volatility, to be high when the VIX is above 20. Extreme levels are above 30. We've seen that a few times already this year, too.

So, we have a fearful market... Then we pair that with some history...

The baseline assessment of several of our colleagues is that frequent "bear market rallies" should be expected within this larger downtrend.

Remember this chart that Dan shared a few weeks ago, showing the rallies within the last two major bear markets – from the dot-com bust and the great financial crisis...

Researchers at financial-services company Piper Sandler looked at the number and size of bear market rallies from both eras. And the results reveal an intriguing trend...

Piper Sandler identified six bear market rallies in the dot-com bust and five rallies during the Great Financial Crisis. In comparing the two sets of data, a striking pattern emerges...

It's obvious, isn't it?

As Dan pointed out, the bear market rallies earlier in the cycle were noticeably smaller than the later ones mainly because of human nature. From his June 3 Digest...

In each bear market, investors became indoctrinated to being bullish and buying every dip for several years leading up to the top.

So in the start of the downturn, Evil Mr. Market didn't need to work hard to entice stubborn bulls back in before punishing them again. As a result, the early bear market rallies were shallow.

But after burning investors too many times, Evil Mr. Market needs to work harder...

The later rallies needed to be larger in order to keep luring beleaguered, increasingly bearish investors before crushing them again.

Sooner or later, investors capitulate. Evil Mr. Market appears to get the best of them. And many folks give up on stocks for years. That's when the bottom finally occurs.

We haven't seen the bottom yet.

At the time of Dan's Digest, the S&P 500 was down 14% for the year but had rallied 7% over the previous three weeks... Optimism was coming back to the markets. But as he expected, the rally didn't last.

The S&P 500 fell 10% to a near yearly low two weeks later on June 16. Since then, it's up a slim 5%, consistent with another small "early bear market" rally. Don't be fooled... The benchmark for U.S. stocks is still below its previous high and down nearly 20% for the year.

(Our colleague Chris Igou also covered the idea of bear market rallies in today's edition of DailyWealth Trader. If you're interested in more examples from the past two major bear markets, Chris' subscribers should check out his issue from today.)

So, that's the backdrop. Then we have the events I mentioned earlier that could be market catalysts...

Why this earnings season matters...

We've been eyeing up second-quarter earnings from America's largest businesses for months.

We began warning of a potential bear market and economic slowdown based on the environment we saw way back in March. As we explained at the time, the influence on corporate earnings was front and center on our minds.

At the time, the official inflation numbers kept hitting new highs... and the Federal Reserve hadn't yet started raising interest rates, though it signaled that it would. As we wrote in the March 10 Digest...

The threat of higher costs combined with slower growth... given the Federal Reserve's plans to raise interest rates... could cause market analysts to reduce revenue and earnings estimates across the board.

Then selling ‒ because of lower expectations compared with current valuations ‒ could beget selling... This is one way bear markets happen...

We can rattle off any number of examples of this playing out...

Stories of retailers like Target (TGT) come to mind. The oil price shock of the first quarter of 2022 ate away quickly into the businesses' profit margins... and supply-chain issues messed with their inventories.

The "no more stimulus" part of the story is significant, too. For pandemic-darling companies like Netflix (NFLX), demand (and new subscribers) related to pandemic lockdowns and stimulus have gone the way of a bad TV show.

In short, the story hasn't changed the past three months. If anything, now we have a rapidly slowing real estate market – with all the existing supply constraints to boot – to add to the conversation.

Early returns aren't good...

Most S&P 500 companies will report financials over the next few weeks, but 18 companies already have. The most widely known, if you've ever had a squeaky door hinge or worn jeans, are probably WD-40 (WDFC) and Levi Strauss (LEVI).

According to a report from FactSet today, 11 of the 18 companies that have reported, or 61%, have said rising labor costs hurt their second-quarter performances. (WD-40 and Levi Strauss were both among them.) And all but two companies discussed raising prices to offset impacts from inflation.

In other words, that's evidence of a dreaded wage-price spiral...

All in all, despite arguments by some (like the White House's PR team) that the economy has never been stronger... it's not a pretty picture. I don't say that to get political, but since the Biden administration waded into economic analysis, someone should set the record straight.

So we'll be watching this earnings season closely. And I sense we won't have to watch too hard because there will be plenty of mainstream headlines about it. Things will really get going later this week with the big banks' earnings.

JPMorgan (JPM) and Morgan Stanley (MS) report their quarterly results before the market opens on Thursday. Citigroup (C), Blackrock (BLK), and Wells Fargo (WFC) do the same on Friday.

A brief look at another 'inflation week'...

As I mentioned earlier, we'll learn the June CPI number on Wednesday. On Thursday, we'll get the June PPI number.

I will not argue with anyone who wants to debate the accuracy of these numbers (and whether they really reflect real-world inflation). But looking at the same set of data each month at least can give us a good directional view of a trend – in this case, inflation.

Market watchers will be parsing the latest round of inflation data to, once again, consider whether we've seen peak inflation. We haven't seen overwhelming evidence.

Some, like our colleague and Stansberry's Credit Opportunities editor Mike DiBiase, say we have a long way to go. As Mike wrote in the June 30 Digest...

We'll see the latest CPI numbers on July 13. If the headline number falls from May's 8.6% reading, the markets will likely celebrate. But they shouldn't. It doesn't really matter if inflation is 8%... or 7%... or even 6%.

Like I said, supply shocks around certain commodities are causing a lot of noise in the inflation numbers. If the number falls next month, the Fed will likely credit its tightening policies.

Don't be fooled, Mike said. It's difficult to reverse inflation – especially when a skyrocketing money supply, dictated by the Federal Reserve, has fueled it. He noted inflation peaked twice the last time we saw numbers like this...

Remember, it took more than two years of raising interest rates in the 1970s to bring inflation under control each time. And rates had to be raised higher than the rate of inflation.

The Fed just started hiking rates in March. With inflation at nearly 9% today, interest rates need to rise much higher than the Fed's 3.25% to 3.50% "neutral" target rate for the end of this year to bring inflation under control.

We're more likely to see double-digit inflation before we see it return to 2% – or even 5%.

In the meantime, though, certain indicators typically linked to inflation are showing what might look like signs of a near-term peak. But that has to do with the "noise" around inflation Mike was talking about.

For instance, commodities prices across the board have been getting crushed over the past several weeks. That might be a healthy sign of cooling inflation... But it could also be that the market is pricing in the risk of a recession (which, at least, might be enough to stop inflation).

When you add in the latest jobs data...

On Friday, the U.S. Bureau of Labor Statistics reported 372,000 new "nonfarm" hires in June and the unemployment rate sticking at 3.6%. Both figures trounced Wall Street expectations.

So when the Fed holds another policy meeting on July 26 and 27, the central bank could say the job market is strong and can survive more "tightening" to fight inflation...

Whether that is true is another matter, though, as our NewsWire team explored today...

For one thing, roughly two-thirds of the new reported hires in the U.S. in June were people who already had another job...

That's right... Most of the jobs added in June (239,000) were people seeking a second job for whatever reasons – likely including an attempt to keep up with inflation.

Plus, the number of folks in America who have two full-time jobs hit a new record high of 426,000 last month, too.

In other words, according to our NewsWire team, the number of new workers in the economy is slowing... with nominal jobs gains offset by folks picking up additional work.

Here's what Wall Street expects...

In any case, Wall Street odds today are on Fed Chair Jerome Powell saying "the economy is strong" and the central bank raising its benchmark interest rate by another 0.75% to address the inflation it helped create... Traders have baked in a 93% probability.

Of course, this time last month, these same traders overwhelmingly expected a 0.50% rate hike. Then the previous month's inflation data came out a few days before the Fed's policy meeting last month, above their expectations, and the odds completely reversed to settle on 0.75%.

I can't and won't say for sure the same thing will happen this time. But an even greater rate hike (like 1%) is not out of the question if this week's inflation numbers, to put it in Fed-speak, "surprise to the upside."

Mr. Market wouldn't like that outcome... Higher rates in response to higher inflation will rachet up recession fears and sour the environment around all the earnings reports we'll get over the next several weeks.

This might sound familiar. It's what happened last quarter. And from the start of previous earnings season on April 14 to the end of May, the S&P 500 fell by 6%... the Nasdaq was off 10%... and many more individual stocks fell by more.

A phrase comes to mind... Here we go again...

So what can you do about it?

We're not personal financial planners, but first things first... please make sure you've got your bases covered. By that, we mean you should have a handle on your expenses and income, maintain a good stockpile of savings, and only invest money you can afford to lose – especially in more speculative investments.

Beyond those basics, we've preached "getting defensive" with your investment portfolio for most of this year and this advice hasn't changed. To be specific, raising cash today is still a good first option.

In general, our team often recommends holding between 10% and 45% of your assets in cash, depending on your circumstances. If you're closer to retirement, for example, you might want to be on the higher end of that range than if you're 25 years old with a small 401(k) balance.

Another idea to consider today is to make smart bets against higher stock prices.

Subscribers to Greg's Ten Stock Trader service have been doing that all year long. As he wrote today, Greg is gearing up for another downward inflection point in the market.

This isn't the easiest thing to say when we're in the business of recommending stocks, but it's true. And it doesn't mean that there aren't good long-term buys to be had... and more very likely to come. Our team always suggests owning some stocks.

Second, to borrow some advice that Chris shared in today's DailyWealth Trader, now is a perfect time to make sure your portfolio sizing is in order.

By that, we mean that you're not "out over your skis" or overexposed to any one position in your portfolio – without knowing the risk of doing so, anyway. For example, in DailyWealth Trader, a shorter-term oriented trading service, Chris recommends...

Stick to your position-sizing rules. We typically recommend risking no more than 1% of your portfolio on any given trade.

If you want to risk 1% of your $100,000 portfolio, the most you're willing to lose is $1,000. This should never deviate based on your mood.

By having these rules in place, not only will you survive the next bear market rally... you'll likely profit from it.

Similarly, for the long term, the team behind our Portfolio Solutions products also is careful to manage risk throughout our model portfolio allocations to protect against significant losses from any single position.

Generally speaking, we don't suggest anyone put more than 5% of your portfolio into any one position. Doing this will limit the potential damage from one holding, especially if you use trailing stops.

And remember our note about the power of owning "low volatility" stocks from back in January. If you do any or all of these things, you'll be ahead of most other people in the markets at growing and protecting your wealth over the long run.

The Fed Fighting Inflation Is Ludicrous

"The Federal Reserve is the cause of inflation," and it's ludicrous the Fed is the one trying to stop it, says G. Edward Griffin, author of Creature From Jekyll Island and founder of the Red Pill University...

Click here to watch this video right now. And to catch all of our 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 7/8/22): None.

In today's mailbag, feedback on Dan Ferris' latest Friday Digest... and some more thoughts on last Thursday's Digest that talked about the yield curve... What's on your mind? Let us know at feedback@stansberryresearch.com.

"Dan, Love the commentary on the bond market and how the Fed has completely broken the 10-year signal. But gold??? Have you noticed how it's also taken a beating recently? As someone with about 25% of my investible assets in Gold and Gold stocks I thought they were supposed to be a hedge against the stock market shenanigans.

"Alright, perhaps I did add a bit of hyperbole to make a point. My physical gold is actually down only 2% since the beginning of the year and my gold and silver stocks (following Gold Stock Analyst and Silver Stock Analyst) are down about 16%. However both are thoroughly trumped by the 26% loss in my trading account. So I suppose gold has done better than the overall market and the drubbing my trading account took.

"On a positive note I must give kudos to Stansberry's Portfolio team. I follow the Total Portfolio strategy for my wife and my retirement accounts and they are only down 16%. It's still tough to see retirement accounts take a hit. But it could be much worse if we'd have been going the index fund route with the Nasdaq (QQQ), down 30% and the SPY off 22% in the same period. Thanks Stansberry for the great advice." – Stansberry Alliance member Mike B.

Corey McLaughlin comment: Mike, thanks for the note. I think you answered your own question about gold, especially physical gold. As Dan wrote in the June issue of his Extreme Value newsletter, about how to navigate a bear market...

I've seen folks on Twitter and elsewhere complain about gold's performance recently. This is absurd. Gold, silver, and cash have performed brilliantly this year, mostly by not getting crushed!

"Dan's comments are explained in a way that anyone should be able to grasp and understand. The best analogy I have read to date.

"I sold 100% of my bond investments earlier this year and have slowly sold stocks as they have either stopped out and others that have produced gains, and [I] don't have any plans to buy either anytime soon." – Paid-up subscriber Larry H.

"Prettiest Mare at the Glue Factory. Best title ever!!!!" – Paid-up subscriber Joe C.

"You don't need an inverted yield curve to predict a recession. The stock market is the best prognosticator. It's been telling us for over six months that a recession was coming. No mistaking this. It's something we haven't seen in many years. The market will tell us six months ahead when the bear retreats." – Paid-up subscriber Richard L.

"$22 trillion in U.S. Treasury notes [the total size of the Treasury market that we mentioned in Thursday's Digest]. WOW, that's unbelievable with inflation numbers in the high 8%? That statistic is only surpassed by Europe's negative interest rates!! What are people thinking right now?

"And to think all those Treasury's are backed up with a national debt we can't afford to even pay the interest on. Oh, that's right, the current 'think' right now in the heart of our brilliant government is we can print and spend as much money as we like without dire consequences. Will someone please get these politicians some better drugs!!" – Paid-up subscriber John M.

All the best,

Corey McLaughlin
Baltimore, Maryland
July 11, 2022