Week over week stocks are virtually unmoved at 4,175, but that gives the false sense that things have been calm when we all know the exact opposite is true, notes Steve Reitmeister of Reitmeister Total Return.
Yet even in the midst of all this volatility and turmoil, there are approaches that are working. Like the fact that the Reitmeister Total Return portfolio has beaten the market for five straight days, leading to a +3.55% return for our portfolio.
So let's review what is going on now...and where things point to in the days/weeks ahead. Even better, let's talk about the game plan to stretch our lead over the market this year. The outlook for the economy is even more uncertain after the shockingly poor -1.4% GDP reading from last Thursday that we discussed in this intraday note; “That’s Really Weird”
And as we all know the market hates uncertainty. This leads to severe volatility with a bearish bias…precisely what we have endured this year with an ugly mix of:
- High inflation
- Soaring energy prices
- Hawkish Fed
- Russia/Ukraine crisis
- Weaker than expected GDP results
I have tackled each one of these topics one by one in this commentary. Each in isolation is not bearish by itself and can show ample historical evidence to support how the bull stays on track. However, to claim that this is a positive backdrop for stocks would be a severe misstatement.
Instead, we are in wait-and-see mode for what happens next. In particular, what happens on the economic front to see if there is any merit to the oddly low -1.4% GDP reading last week. Here is what I said about this yesterday in my POWR Value commentary:
“…the vast majority of experts I follow believe the weak print of Q1 GDP is downright laughable. Or to put it this way…if this report was a sign of more economic damage to come, then there is no way that the GDPNow Q2 forecast from the Atlanta Fed would be as high as +1.6%. Nor would the Blue Chip Consensus panel of economists see growth almost twice that level at +2.8% for the current quarter. The point is that there is not much reason to call for a recession and bear market at this time.”
ISM Manufacturing (ISML) this week was another feather in the “economy is just fine” camp. Hopefully the same will be true with ISM Services on Wednesday, followed by the Government Employment report on Friday.
Now let’s imagine that this weak GDP report was indeed an aberration. Then this portion of my POWR Value commentary from Monday would also be true:
“…stocks are likely in a bottoming process. One could say that 4,000 could very well be that level given the tremendous support that is found at all century marks on the index. If we broke below 4,000 then it could be a move down towards the border of bear market territory at 3,855. That is precisely 20% below the all-time high of 4,818.62.
To head under that mark would be a sign of conviction on the part of investors that indeed recession is coming and a bear market is a natural outcome. Yet, I do not believe that conviction is there.
First, because the economy is not truly in a recession (as noted above). Second, because there is no other attractive place to invest in right now. That’s because putting your money in cash or bonds is a guaranteed loss versus high inflation right now. So that will turn more heads toward the stock market coming off yet another strong earnings season with corporate profits projected higher for the future.
This is an often-overlooked economic indicator. Because corporate managers need to keep earnings guidance low, making it all the easier to leap over when they report next.
So the very fact that guidance was indeed strong after Q1 earnings means that these highly qualified people, with their feet firmly on the ground of the economy, do not see the signs of slowing. To me that says the odds of a recession are very low and that soon investors will 'buy the dip' and 'climb the wall of worry' to close the chapter on this correction once and for all.
Or to put it another way…I expect us to have a scary drop towards a new capitulation low between 3,855 and 4,000. And at that darkest hour, stocks should bounce with gusto, making it prudent to stay bullish at this time.”
Is it possible that the Monday low of 4,062 is close enough to 4,000 to say that bottom has been found? Yes…but unfortunately not as likely as what I noted above as a correction of this magnitude typically comes with a more dramatic bottoming process.
But the story remains the same, leading us to keep our bullish bias in place for now because the facts say the risk is to the upside, not downside, from these levels. If and when the facts change, so too will our investment approach.
