Turn Off the TV

Recession talk all over television... Turn off the TV... Scott Garliss on the long-term bullish case for stocks... The stocks to consider today... More opportunity in the bond market rout...

They were all talking about a recession...

Given the incredibly high noise-to-useful-information ratio in the mainstream financial media, I (Corey McLaughlin) don't watch very much CNBC... If I do, it's usually with the sound off just to look at the numbers and tickers on the screen.

Even that is a mistake.

Once I'm sitting there with the picture on, it's hard to completely ignore all the visuals, including the letters across the bottom of the television... those short headline graphics known as chyrons.

So it happened yesterday... All of a sudden, it seemed that it was breaking news that the CEOs of some of America's biggest banks and other companies are expecting a recession ahead in 2023.

JPMorgan Chase CEO Jamie "the Hurricane" Dimon, plus the CEOs of Walmart, United Airlines, Union Pacific, and General Motors – all were on CNBC talking about this likelihood. This shouldn't be a surprise to you... We've been talking about the possibility for a year...

I wondered if something had fundamentally changed...

The headlines and tone yesterday seemed rather dire, and the major U.S. stock indexes were down for a fourth straight day – the longest such streak in about a month. Turns out, based on some brief digging, nothing fundamentally changed.

We've still got 40-year-high inflation... we're in the midst of a yearlong run of economywide interest-rate hikes... and the jobs market is starting to weaken. We've talked about all of these things before.

The only difference? Yesterday happened to be the date of a huge financial gathering in New York City, the Goldman Sachs U.S. Financial Services Conference. Because the event attracts a bunch of CEOs, New York-based media groups can easily set up interviews.

And that means instant headlines, clicks, and views at a low cost... So that's that. Lesson learned and remembered: Turn off the TV.

But there was a silver lining...

First, it's a reminder that a lot of what's said in the media simply comes down to timing, access, and someone else's choice of guest or topic. Secondly, it served as a good reminder of another timeless lesson...

Go beyond the headlines to find the valuable information...

Thankfully, yesterday our Stansberry NewsWire editor C. Scott Garliss sent us a report on what to really make of what these CEOs were saying. I found it so enlightening and timely I want to share it with you in full today...

Scott worked for 20 years on Wall Street before joining Stansberry Research and has a wealth of knowledge about how institutions like the big banks think and make decisions. Said another way, he'll tell you things you won't hear from a talking head on TV.

If you don't already follow his work in our free NewsWire service, be sure to do so here.

Scott takes things over from here...

As we've discussed all year, the Federal Reserve is seeking to kill domestic economic growth...

Fed Chairman Jerome Powell, New York Fed President John Williams, and Minneapolis Fed President Neel Kashkari all told us in early May that the central bank needed to raise interest rates to bring supply and demand back into balance.

The trio said savings and household disposable income had risen too far. So, they needed to raise rates to reduce the available spending of households. Part of that plan was to kill housing prices to bring down the shelter component of inflation... further reducing available sources of money for individuals.

Now, where I live, most people have the bulk of their wealth tied up in the value of their homes. And if the central bank's game plan is to kill everyone's net worth, then people feel less wealthy... and their spending and other economic activity tend to suffer.

This is the "reverse wealth effect," which our colleague Dan Ferris has described before.

The media and some big-bank CEOs – notably Dimon and Bank of America's Brian Moynihan – seem to be catching on to this outcome. And the dynamic is weighing on the S&P 500 Index as a result.

However, slowing economic growth will weigh on inflation, and that should boost the long-term outlook for risk assets like stocks.

Here's why...

Since commencing with the first interest-rate hike of 25 basis points in March, the Fed has increased the federal-funds target from a range of 0% to 0.25% to the current level of 3.75% to 4%. And based on recent comments from Powell, another increase of 50 basis points is all but certain at the monetary-policy meeting on December 13 and 14.

That means the Fed will have raised interest rates by 4.50% this year, far outpacing any of the other major global central banks. Take a look at the monetary-policy paths this year for our central bank compared with the Bank of England ("BOE"), European Central Bank ("ECB"), and the Reserve Bank of Australia ("RBA")...

Since 1980, this has been the fastest tightening cycle by the Fed. But as we said earlier, those changes come at a cost... It's more expensive to borrow money. In other words, there will be less money floating around in the financial system to spend.

Now, there are two important outcomes...

The first is that households will have less disposable income because of the increased costs for things like credit-card debt, home loans, and car payments. So there won't be as much money available for discretionary items like electronics or clothes.

The second outcome is that money managers will likely employ less leverage because it costs more to borrow. For example, at the start of the year, you'd have to make 2% on your investments to be at breakeven (minus the cost of funds).

But now, you have to return 6% to get back to flat. That's a big change. And considering the S&P 500 is down 16.3% this year on a total return basis (dividends reinvested), the bar on the hurdle is even higher.

This is why recession fears have resurfaced...

Are you going to price a stock's fair-value price-to-earnings (P/E) multiple at 17 or even 20 times like you did when interest rates were zero? Of course not. After all, it costs more money for fund managers to borrow and lever up to invest in risk assets like stocks.

And because of the jump in volatility due to the Fed's rate-hike plans and the consequent economic uncertainty, potential returns can be wiped out more easily.

Money managers aren't being paid to blow people's life savings. They're earning fees by making people money and growing their wealth. Their job is to make calculated bets investing in ideas with the highest return potential and least amount of risk.

So, those institutional investors are going to be less willing to pay high multiples for stocks... especially technology companies that need to borrow heavily to grow.

As we said before, this is because the cost of funds eats away at your returns over time. So if you're paying up for an idea that doesn't make money and has a high P/E multiple, you need to be certain it's a risk worth taking.

That's why you should look for investment opportunities in proven companies with fortress-like balance sheets, tons of free cash flow, and steady dividends that are trading at multiples of, say, 14 to 15 times.

Being more careful and strategic in your investment process makes you more likely to outperform your peers and the market. That's what money managers are paid to do.

So the stock market won't command a high-flying multiple until borrowing costs drop. And based on guidance from Powell, that could take a while.

Stock markets don't go up in straight lines...

The Fed's inflation-crushing goals are worthwhile. Demand needs to slow to get inflation growth back down. We want to see this process happen.

In the short term, there will be pain. But longer term, it's what investors and the market need. And if we do see a recession, it will prove to be a buying opportunity – because trust me, every money manager is anticipating the event.

The dynamic will ultimately lead to the Fed lowering interest rates once more and create a long-term tailwind for the S&P 500.

(Corey taking things over again here... Like I said, it pays to turn off the TV.)

Moving on to a related note about yesterday's Digest...

I wrote yesterday about one of the most "hated" investable assets in America... bonds. In brief, the Fed's rate-hike push has crushed their value in 2022, somehow to many people's surprise.

Little did I know that around the same time we were writing yesterday, our colleague Mike Barrett was putting the finishing touches on his most recent update in Select Value Opportunities on roughly the same topic.

We talked mostly about U.S. government bonds yesterday. Mike did too in his update, published this morning. But he also wrote about how corporate bonds are showing signs of an early comeback, too...

Mike noted that the largest U.S. bond fund – the $500 billion-plus Vanguard Total Bond Market Index Fund (VBMFX) – was on track for its worst year since inception in 1986. He said bonds could have their worst year since 1926.

Then he looked to the future...

But the bad times for bonds won't last forever. They never do. At some point, big corporations – like those comprising the S&P 500 and Nasdaq-100 indexes – begin issuing new bonds again. And investors, including bond funds and ETFs, renew their buying.

Our research suggests this is already underway...

Over the last three months, several mega-cap investment-grade companies have returned to the bond market to raise fresh capital. This includes Walmart (WMT), Lowe's (LOW), McDonald's (MCD), and Target (TGT) – all constituents of the Select Value Opportunities database.

Following a better-than-expected Consumer Price Index report for October, investors have stormed back into bonds, too. According to weekly fund-flow data tracked by financial-services firm Refinitiv Lipper, taxable bond funds (including [exchange-traded funds]) attracted new capital for the first time in nine weeks. Furthermore, tax-exempt bond funds and ETFs took in new money for the first time in 15 weeks.

But Mike wasn't just explaining this simply to analyze the bond market. He then recommended shares of a "fantastic business" that stands to profit from a bond market comeback. As new bonds are issued, this company's services will be in high demand.

Select Value Opportunities is a tool that we share exclusively with our Stansberry Alliance members, who can find the details on this recommendation here. Our Alliance partners can also find all Mike's updates and look up the fundamental valuations on 100 popular stocks at no extra cost in Mike's proprietary database right here.

New 52-week highs (as of 12/6/22): None.

In today's mailbag, feedback on yesterday's Digest about "hated" government bonds... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Bonds are not about to turn around anytime soon. The Fed is not lowering the discount rate. It may be slowing the rate of increase, and any increase will depress bonds.

"It is likely that the past 20-year bull market in bonds is over and will be replaced by a multi-decade bear market as the massive increase in boomer retiree savers will politically destroy whomever tries to bring back negative real interest rates." – Paid-up subscriber K.M.

All the best,

Corey McLaughlin and C. Scott Garliss
Baltimore, Maryland
December 7, 2022