The Results of Our Mid-Year Checkup

A worthwhile exercise... The results of our mid-year checkup... The year the 'pandemic bubble' burst... What a bear market really is... The U.S. dollar is ripping higher... A good sign or a bad sign?... What comes next...

It's time for another 'mid-year checkup'...

I (Corey McLaughlin) started doing a "mid-year checkup" in the Digest last year. It's a way to zoom out from the daily market noise and look at what has actually happened through the first six months of the year.

It's a worthwhile exercise...

For instance, this time last year, we noted inflation concerns being the theme of the first six months, at least as we saw it. The Federal Reserve was staying pat with inflationary policies despite rising prices all over the place.

As I wrote in the June 30, 2021 Digest...

The central bank has kept dollars cheap and has kept lending to itself at near-zero rates. All the while it continues to discount present inflation as "transitory" during what will be a long pandemic recovery...

Of course, real-world inflation – higher prices at the gas pump, grocery store, and lumberyard – [has] hit everyday folks in a very real way...

This mid-year breather 12 months ago also showed us that some of the most "hated" stocks in recent memory – like those of energy companies – were the biggest leaders of the first half of 2021. That's a trend that continued until very recently.

Oil company Chevron (CVX), for instance, was up 23% in the first six months of 2021. It finished the year with a nearly 40% gain. As we wrote this time last year...

If 2020 was a year for the "digital economy," 2021 has been the year that the "old economy" makes a comeback...

Everyone needs workers... New homes need lumber... Kids need diapers (a paper product)... Cars need gasoline (meaning oil)... You don't get older industries than these...

At the time, a barrel of West Texas Intermediate ("WTI") crude oil was trading around $73, already its highest price since early 2018. But we noted it had room to run higher given the broader supply-demand dynamics in the industry.

Sure enough... oil went over $100 earlier this year, following the Russian invasion of Ukraine.

To be fair, you can pick any start and end date on a calendar and come up with different observations and conclusions based on the time you choose and what happened during it.

But the point is, taking a step back every once in a while – or more than once in a while – is a worthwhile endeavor in life and the markets. You can start to see some trends that you might otherwise miss – trends that can go on longer than you might think.

So, with the first six months of another year behind us again, it's time for another mid-year checkup. Let's take a spin around the financial world...

So far, 2022 is undoubtedly the year of the 'pandemic bubble' popping...

The halcyon days of Davey "Day Trader" Portnoy sitting at home in a T-shirt, trading shares of tech companies and little-known cryptos online, and claiming "stocks only go up" are long gone...

By now, you know we're in a bear market. That sounds bad. But this shouldn't necessarily scare you.

Bear markets have happened before for various reasons and they will again, just like bull markets. They can present generational buying opportunities, so long as you protect your capital before the worst arrives.

We shared several warnings about the odds of a bear market this year, even before the war in Eastern Europe broke out.

But what we've seen in the first six months of the year has been truly historic when it comes to a sell-off in stocks and bonds, the two asset classes that make up most folks' portfolios...

As our colleague and Stansberry's Credit Opportunities editor Mike DiBiase just shared last week, stocks just endured their worst first-half performance since 1970, as measured by the U.S. benchmark S&P 500 Index.

Year to date, the tech-heavy Nasdaq is down 27%... the small-cap Russell 2000 is off 23%... the S&P 500 is down 20%... and the Dow Jones Industrial Average is off 15%.

To broaden this note even further, the conventional 60/40 stock-bond portfolio is down more than 15% so far. That's its worst first-half performance since 1932, according to Ned Davis Research, when the allocation was down 22.5% in the first six months.

Few people were prepared for this outcome...

Conventional wisdom – and the idea behind the 60/40 portfolio – say that even when risky assets like stocks fall in value, "safe" assets like government bonds do not... letting them serve as a ballast for a portfolio.

But if you were following along with us, you heard our warnings. We pointed out that you might want to consider an unconventional approach because stocks and bonds selling off together was entirely possible, if not likely... because of a big thing called inflation.

This is why our colleague and Stansberry Research partner Dr. David "Doc" Eifrig launched his Intelligent Retirement model. It's an alternative to the conventional wisdom that what worked before would keep working this year. (Income Intelligence subscribers can find the latest update here.)

Doc was very clear that folks should rethink what they've seen over the previous 40 years and diversify out of merely stocks and bonds. That's because the value of bonds was likely to fall, and their yields wouldn't climb high enough to keep pace with the rate of inflation... and stocks were overvalued by many measures.

We started to see this play out in late 2021, as soon as the Fed indicated it would be finally raising interest rates and pulling back on other pandemic-related stimulus efforts – into what has become an economic contraction in an era of high inflation.

Growth stocks started selling off across the board first, and plummeting on any bad news, like streaming giant Netflix (NFLX) experienced this past winter.

Netflix shares fell 20% in January after the company reported a slowdown in subscriber growth in the fourth quarter of 2021... Three months later, the stock fell another 30% following its first-quarter earnings numbers.

At the same time, bond yields, which trade inversely to prices, started to rise... We wrote about the danger to portfolios in February. Things got dramatically worse from there.

What a bear market really is...

Despite all the noise you might hear in the mainstream media, what's happening today really comes down to the following concept Doc shared in the first issue of our Stansberry's Financial Survival Program back in April...

You could define a bear market as the rising value of the U.S. dollar versus financial assets.

Likewise, when commodities... or real estate... or foreign currencies... go through a bear market, what you're really seeing is the rising value of the U.S. dollar as compared with those other assets.

If you take nothing else from today's Digest, please take this thought about what bear markets really are...

Longtime readers know we have our doubts about the U.S. dollar's viability as a reserve currency for the next 100 years. But in the short term, as the Fed has moved to "fight" inflation with higher interest rates, it has made the cost of borrowing higher and thus made dollars more expensive.

So while few folks think about it like that, it turns out cash has been the best place to park your money this year... specifically U.S. dollars compared with the rest of the world's currencies.

The U.S. Dollar Index ("DXY") – which measures the greenback versus the euro, Japanese yen, Canadian dollar, Swedish krona, and Swiss franc – is up 16% over the past year, including 12% in just the first six months of 2022...

A stronger dollar means other assets – like commodities, real estate, stocks, cryptos, and even gold – are facing an uphill battle against the greenback... This trend won't last forever, but it's in place right now.

Today, the dollar is approaching a 20-year high and has outperformed the S&P 500 by 30% this year. The last time the index was this high and in an uptrend was in March 2000 – at the peak of the dot-com bubble.

You can take this as good news (the odds on the dollar going higher aren't great) or bad news (if you think the dollar has room to get stronger still, such as through higher interest rates or because of a deep recession in Europe).

Only one major U.S. stock market sector is in positive territory this year...

That's energy...

The Energy Select Sector SPDR Fund (XLE) – led by ExxonMobil (XOM) and Chevron – is up 23% since the start of the year, but with an important qualifier...

This fund is down roughly 20% in the last month alone, as momentum has shifted out of the inflation trade... and investors are considering the "recession" trade instead.

That said, energy is the only S&P 500 sector showing gains in 2022. The rest are negative, with consumer discretionary stocks leading the way down, off 30% for the year.

Utilities, consumer staples, and health care stocks are down the least, off 1%, 4%, and 7%, respectively.

This is consistent with what we shared in a "bear market warning" issue in March, which showed these sectors among the best performers during each of the previous six extended bear markets.

So as far as sector performance is concerned, this time has not been different. As our colleague Chris Igou wrote in the July 1 issue of DailyWealth Trader...

Remember, while consumer staples stocks hold up well to high inflation, discretionary stocks don't.

These are the kind of goods consumers give up first. They're "luxury" items instead of things we need.

There's also a "double whammy" effect going on for this sector. The first issue is inflation. But a U.S. recession is also likely looming.

Both cause consumers to tighten their budgets. And that hurts the sector even more.

Now we're watching for when the bottom for stocks might arrive...

While this time will come... we can't say for sure when it will be time to "back up the truck" and buy great businesses, regardless of sector, at cheap prices.

As we've said lately, we're closer to a bottom than just a few months ago, but we can't say for sure we're there yet. Nor do we necessarily have to. We just want to get close.

Here's one thing to consider, which you can clearly see as an important factor when you take the time to look...

When the dollar starts to weaken again – and it inevitably will – this will be a bullish signal for stocks and other assets.

In the meantime, our colleague Dan Ferris painted a sobering picture in Friday's Digest, that this could be the start of a long bear market. Nobody can say for sure that it will, but it's at least wise to consider the possibility of stocks not recovering losses for longer than most people think.

I'm watching market-breadth indicators – which are still in a downtrend. Only about 20% of stocks listed on the New York Stock Exchange are trading above their 200-day moving average (200-DMA), a simple technical measure of a long-term trend.

That's a little higher than the percentage was earlier this month, but we haven't seen enough of a trend reversal yet to go all-in on stocks again. That isn't to say there are no buying opportunities in certain stocks, but there are also still stocks worth avoiding at all costs.

And, in any case, while the conventional 60/40 stock-bond portfolio will go up again someday... it still faces large risks.

What comes next...

These ideas are all embedded in the latest message that our friend Marc Chaikin, founder of our corporate affiliate Chaikin Analytics, is sharing today.

Three months ago, you might remember Marc went on camera to tell anyone who would listen that we were already in the middle of a "rolling" crash that would continue in 2022.

Today, he's also warning of a shift that could soon create more losses for investors... but also dramatic profits for the few who understand what's really happening in the markets.

To hear more from Marc – who is truly a Wall Street living legend – click here for all the details about what he thinks will happen next. Among other things, Marc shares when he thinks we can expect a market bottom... and what a recession could mean for your portfolio.

You'll also hear more about Marc's fascinating and impressive background over five decades in the markets... how he has developed tools that are used by Wall Street pros today... and why he decided to help level the playing field and make these tools available to individual investors.

These are tools like his "Industry Monitor," which illustrate which sectors could soar in the months ahead and which ones are flashing bearish warning signs that you could manage to avoid completely... or even bet against.

Just for tuning in to Marc's presentation, you'll hear his No. 1 stock to buy today. He also shares the ticker symbol of a stock you should avoid owning, which could crash soon and hit the mainstream financial news headlines. You can watch for free here.

The past six months have been a confusing time in the markets for a lot of people. If you're looking for more guidance on how to navigate the next six months, make sure to give Marc's latest video a try.

'Bear Markets Always End'

To kick off the second half of 2022, Stansberry Research senior analyst Matt McCall sits down with Cullen Roche, the founder and chief investment officer of advisory firm Discipline Funds, to talk about how to set yourself up for a strong finish to the year...

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 7/5/22): None.

In today's mailbag, feedback on yesterday's Digest about a recession being all but "official"... and yet more thoughts on Stansberry's Credit Opportunities editor Mike DiBiase's essay last Thursday about the real cause of inflation... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"My experience with economists is that they couldn't pick the winner of a one-horse race." – Paid-up subscriber Robert V.

"Bring on the recession please, big and hard. Tell Powell to get some hubris like Paul V. In the early 70s!! We need to kill off this crazy snake of hyperinflation. In 1923 Germany had the very same mind set and issues we are facing now. The Germans missed a payment of reparations to neighboring countries. Then the troops moved in and Germany told its citizens NOT to work and continued to pay them anyway.

"To fund this insanity Germany just started a massive printing money campaign. It got so crazy that worker's pay was raised twice a day because the pay scale they were on in the morning was worthless by that same afternoon. Sound familiar?

"It's better we take the short-term pain now, get over it, and move on. Otherwise we could have another Germany circa 1923. The Fed has NOT done us any favors with the actions they have taken over the last few years and now it's time to pay the piper." – Paid-up subscriber John M.

"Mike's Thursday Digest was the best Digest and most useful Digest I have read. Please let Mike know I appreciate the analysis and I started refreshing my economic education reading about Milton [Friedman]. I like Dan's stuff too... good long reads with a strong cup of coffee on the weekend... thought provoking." – Stansberry Alliance member Mike K.

All the best,

Corey McLaughlin
Baltimore, Maryland
July 6, 2022