It's been nearly a month since stocks tested the bear market lows, notes Steve Reitmeister of Reitmeister Total Return.
A lot of that has to do with the very welcome decline in commodity prices including lower prices at the pump.
This has some investors contemplating if the bear market is now over. Well...it ain't! Yes, I appreciate that a simple statement is not a convincing argument. So let me spend more time spelling it out in this week's Reitmeister Total Return commentary.
First things first...did you see my POWR Platinum presentation from Monday 7/11? If not, then you should do that now as I covered a wide range of important topics such as: Why still a bear market, how much lower we will go, bear market bottom lessons from history, the best resources to tame the bear market, and much more...
Assuming you watched the webinar above...now let’s pick up the story from there. That is mounting evidence that we are already in recession. And if true, which it certainly seems to be, then appreciating the next shoe to drop in the bear market process.
That being a likely earnings recession on the way. A growing number of experts are pointing out that the Q2 earnings season will likely ignite a round of estimates cuts from Wall Street analysts. Truly these analysts have been late to the party in appreciating the true state of the economy and how current earnings estimates are far too high.
Meaning now is not a time that we will enjoy peak earnings. The economy is weak and thus earnings will take a logical step backward.
The above only makes sense if indeed the economy is faltering. So after a surprisingly weak -1.6% read for Q1 GDP we are not looking much better in Q2. According to the most respected model, Atlanta Fed’s GDPNow, we are looking at -1.2% for Q2.
Two quarters of negative GDP = Recession
That equation means that Corporate America is not doing as well. That should be on full display this earnings season and the second half of the year.
This is not as much about the beat/miss nature of Q2 earnings. Rather the key lies in the guidance these companies give for the future. Note that indications from the early reporters already point to this reduced outlook being the case.
Now let’s appreciate that the average recession brings about a 26% decline in S&P 500 earnings. I suspect this recession will be a tad milder than average and likely only see a 15-20% earnings reduction.
However, even that milder earnings recession has not been factored into current share prices as Kara Murphy, Chief Investment Officer of Kestra Holdings said in the quote below:
"Markets had priced in already a fair amount of this earnings slowdown, but they've not priced in an earnings recession. We're not at a point where we could say the market is cheap."
To be clear an earnings slowdown = slowing of growth.
Earnings recession = lowering of earnings estimates. And since that likely is soon in the offing, then stocks have to come down more to accommodate that weakened outlook.
Next up, let’s consider the NFIB Small Business Optimism Index which came out Tuesday morning at 89.5 which is the lowest reading since January 2013. Even worse, 61% of the business owners expect business conditions will deteriorate over the next six months.
That is the lowest recorded level in the 48-year history of the survey. Yes, lower than during Covid or the Great Recession.
Now let’s add to the mix what bontell is telling us by the recent inversion of the yield curve. That is where the ten-year Treasury rate of 2.97% is lower than the two-year rate of 3.05%. This signal is considered very bearish as it has preceded so many recessions and bear markets.
Yes, I for one have pointed out in the past that the signal is distorted by the Fed compressing long-term rates. But month by month they are taking their foot off the neck of those rates and they are starting to float closer to real market values. So this bearish signal is becoming more and more meaningful.
Add it up and the writing is on the wall. We are in recession and the full weight of that outcome is not accounted for in the current earnings outlook.
When that outlook dims, so will the outlook for stocks pushing stocks to fresh lows during this bear market cycle. That is why I continue to have a mix of four inverse ETFs that rack up gains as the market heads lower.
Somewhere between 30-40% decline from the all-time highs of 4,818, we will likely find the bottom. That would be a bottom between 2,891 and 3,373. Yes, a wide range, but every bear market is different.
The key point is that with stocks currently at 3,818 then it is not too late to employ these strategies to profit from the bear market before we switch gears to bottom fishing the best values for the emergence of the next bull market.
Let’s not get too far ahead of ourselves as that is likely three-six months down the road. For now, it’s a bear market, and best to trade accordingly.
Portfolio Update
A modest decline in the market this week = a modest increase in our portfolio value.
Again, with earnings season about to unfurl that should provide the next catalyst to the downside as stated above.
So, if it is going to rain...you want to put out rain buckets to gather all the water. That is exactly what we have with our 6 portfolio positions shared below:
Shorting Stocks: (HDGE, HIBS, SDS, TWM) There is never a shock in how SDSdaily daily basis given their clear alignment with the underlying S&P 500 and Russell 2000 indices. The question marks arise on how well HDGE and HIBS will do that day. And even there they are not aligned. For example, HDGE is a 1X inverse ETF that climbed +1.36% today while HIBS is a 3X inverse that only mustered a +1.84% gain.
net the sum total of these four positions have been just what the doctor ordered as the bear market made its first push to lows a month ago. And will be again as we likely explore lower lows in the weeks ahead.
Shorting Bonds: Taking a 62% gain on 20+ Year Treasury Shares (TBT) has been the right call for sure as ten-year rates have slipped from 3.5% to 2.97%. However, as expected FolioBeyond Rising Rates ETF (RISR) is holding up better, and am interested to see what happens to shares after the next Fed rate hike on July 27. Hopefully, I am right that we are still well aligned for profits on how RISR is constructed. If not, then that will hit the bricks too.
As for ProShares Short High Yield -1x Shares (SJB) it is all about greater realization by the investment world that this is indeed a recession that will get worse before it gets better. As that understanding swells, then so too will junk bond rates...and so too will SJB shares.
Closing Comments
By the way, I am putting on an important webinar today, July 14 entitled “100 Best Stocks for July”. This provides an in-depth look at our POWR Screens 10 product which is by far our most popular service this year given the stellar outperformance even in the face of this bear market.
If you do not have access to POWR Screens 10, then I highly recommend you watch the webinar to see if it is right for you. Even if you aren’t available to watch live, be sure to register below so you will get sent an on-demand replay version.
