Investors were once again foolishly bidding up stocks coming into the inflation report Tuesday morning. Bulls were slaughtered when they found out that inflation is not fading away and that likely spells more economic pain on the way as the Fed will need to stay on the rate hike war path. Bears are back in charge. And perhaps ready to mount an attack on the recent lows of 3,636 for the S&P 500 (SPY). And likely much lower. Why is that? And how can you stay on the right side of the trading action? The answers await you in the article below.
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(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).
The bounce back to 4,000 for the S&P 500 (SPY) made some sense. It was time for bulls to take the wheel after three weeks of a mauling bear market. However, the move above 4,100 was comical.
Even more insane was traders eagerly buying stocks pre-market on Tuesday expecting inflation to ONLY come in at 8%. Thus, when the reading was 8.3% they soiled their beds and stocks tanked in a hurry to provide the biggest one day drop on the year.
What on earth would make these people think that 8% inflation is OK? Heck, even if it came in at 7.8% that is still about 4 times above the Fed’s target with many more hikes and much more economic pain to come.
Let’s get back on board the sanity train with this week’s review of bear market conditions. This comes hand in hand with an updated trading plan of how we not just survive, but actually thrive during the 2022 bear market.
Tuesday’s -4.32% shellacking of the stock market was not a surprise to anyone watching my updated marketing outlook shared Monday in the POWR Platinum monthly webinar. We discussed why its still very much a bear market. And how similar the action is to 2000-2003 with many “suckers rallies” sprinkled in to trick investors before the true and lasting bottom was found.
Perhaps the most important part was reviewing the new “Fed Commandments” etched in stone by Chairman Powell and handed down to investors from the mountain tops in Jackson Hole. It basically proclaimed to anyone who will listen…
Thou Shalt Expect:
Long term battle with inflation
Higher rates through at least 2023…if not longer
That presentation is a good place to get started today to cover why we should take the Fed at their word and prepare for more economic pain and market downside to come. And yes, Tuesday’s horror show was but a small taste of what is to come.
Now back to today’s action.
Inflation is still here.
This is ONLY a surprise to those who were solely basing their view of inflation on the price at the gas pump. And yes, gladly that is down greatly across the country.
Unfortunately, there is much more to the inflation equation which was on full display in today’s far too hot +8.3% reading. This headline from CNBC tells the rest of the story:
As we dig into the details, we find that the food at home index is up a whopping 13.5% year over year. Not far behind is increases in medical services.
Then we find that “sticky inflation” for wages and rents are not showing any signs of slowing. They are called sticky because they stick around and not so easily dispensed with.
This is where we get back to a great divide in investing.
Anyone with even a modest understanding of economics appreciates that:
High Inflation + Hawkish Fed = Recession = Bear Market
Whereas those that talk about charts and price action…or who believe that the stock market is just some video game played on their screens think that what goes down must go up.
Yes, in time every bear market ends and prices will go higher. But the full measure of economic pain to come has not been dealt out. And thus, the final stock market bottom has not yet arrived. And thus, there is no virtue or staying power in these ill-fated rallies.
To be clear, I still think we find bottom somewhere between 3,000 and 3,180. The latter demarks a 34% decline from the all-time highs (4818) which is the average drop for a bear market. The reason this one could very well fall more than average is because valuations for the market got a bit extended thanks to the low rate environment.
As you know we are a great deal above the paltry 1.4% yield for the 10 year Treasury at the time the market made its all-time highs in January. Today those rates made it to a new multiyear high at 3.4%. And probably will end up 5%+ when all is said and done.
In that environment stocks are worth less because people can make a higher than normal “risk free” rate in bonds. So, the price for stocks valuations will need to come down enough to make it attractive for investors to take that risk once again.
Now let me shift to another interesting topic that has come up many times with customers who are struggling to understand how this is a bear market when employment I still looking so strong. Here is the answer I emailed to a client recently that tries to simplify that vital topic:
“I totally get the quandary which is part of the markets current struggle.
First, employment is a lagging indicator. Meaning it is one of the last things to go bad in the economy. Kind of a like a smoke detector that goes off well after the house is halfway burnt down.
Second, high inflation and recessions go hand in hand.
Third, the Fed has told us point blank that they need to fight inflation and it will cause pain. And yes, that pain extends to labor markets which they noted specifically.
So it is not about the current picture…it is about where things are headed. The only question is whether damage will be a lot or a little.
If a little, then soft landing will emerge with shallow bear market. Meaning that the recent lows of 3,636 hold up and then new bull market begins.
If more damage is on the way, then deeper recession and bear market unfold where we head lower than June lows and likely more in the neighborhood of 3,000 to 3,200 when all is said and done.
I believe the latter scenario is more likely…but open to the soft landing scenario which is why we are hedged and not just straight up short.”
As for our hedged portfolio, it held up wonderfully today with a +0.67% gain while the market tanked -4.32%. Now imagine how well it will do as stocks have probably 20%+ more downside til we find the true bear market bottom.
With that much downside to go it is not too late to act. And don’t forget that it only takes about 5 minutes to bolster your portfolio with the hedged strategy recommended in the Reitmeister Total Return.
The time to act is now!
What To Do Next?
Discover my hedged portfolio with 9 simple trades to help you generate gains as the market descends further into bear market territory.
This is not the first time I have successfully employed this strategy. In fact, I did the same thing at the onset of the Coronavirus in March 2020 to generate a +5.13% return the same week the market tumbled nearly -15%.
If you are fully convinced this is a bull market…then please feel free to ignore.
However, if the bearish argument shared above does make you curious as to what happens next…then do consider getting my “Bear Market Game Plan” that includes specifics on the 9 positions in my timely hedged portfolio.
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares rose $0.70 (+0.18%) in after-hours trading Tuesday. Year-to-date, SPY has declined -16.62%, versus a % rise in the benchmark S&P 500 index during the same period.
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.