You know what they say about opinions...they are just like noses 'cause everyone's got one, states Steve Reitmeister of Reitmeister Total Return.
The point is that there are varying opinions on where the economy is headed and what that means for the stock market. This only increases investor confusion, which adds to market volatility.
Yet if we use history as our guide we can see how the increased pessimism, even though not unanimous, really is enough to tip the scales to conclude a bearish outcome for stocks. That topic and more is what's in store for this week's Reitmeister Total Return commentary.
Market Commentary
Over the weekend, I saw a news item that really stood out. That being an extensive CNBC survey which showed that 45% of economists are predicting a recession in the next 12 months.
On the surface, that news doesn’t sound too bad. Meaning it feels like it could go either way, which gives us some hope that all could be well.
Now let me throw some cold water on that notion. Unfortunately, the average recession started when only 40% of economists predicted that negative outcome.
Yes, this is most certainly a red mark on the economics profession. That is why we constantly say it is an inexact science. Clearly, very inexact.
This news is yet another in a long line of facts that points me to a bearish conclusion. The most vital of which is the tried and true correlation between high inflation leading to recessions. Unfortunately, they go together as two Lego pieces.
Seeing how many economists are tilting towards recession does continue to tip the scales in a bearish direction. Now let me add this part that I discussed in my POWR Value commentary on Friday:
“According to recent surveys by The Conference Board, 77% of CEOs believe that recent economic conditions have worsened over Q2. That is up from 61% who felt that way when surveyed in Q2. Even more gloomy, only 7% predict sustained growth in 2023.
If executives are predicting recession...then it likely will become a self-fulfilling prophecy. That’s because their negativity leads to caution in how they manage their business, which leads to lower tolerance for spending or investing in the business. The more companies that move forward with that caution by its very definition equates to lower economic activity and increased odds of a recession.”
Back in the late Spring, I talked about how recessions and bear markets are like a “thought virus” that spreads from person to person. This bug is not only infecting corporate executives but everyday people given the incredibly low readings for Consumer Confidence and Consumer Sentiment Readings.
No doubt the consumer is under great strain as their wages are not keeping up with raging inflation making them feel poorer by the day. It is for this reason that the Fed so vigilantly works towards the goal of 2% inflation as much higher than that leads to a lot of economic pain.
This is not just a problem in the US. The world economy is under similar strain as was made quite apparent in this morning’s S&P Global Composite PMI. Here they look at the broad economy (services and manufacturing) where a reading of 50 or above equals expansion.
Now let me tell you that the report plummeted from 47.7 to 44.6. Yes...way below the vital 50 level pointing to serious contraction. Here is the key line of analysis from the creators of the report:
“Service providers registered a sharp decline in production and the downturn in new orders accelerated to a two-year low, while output and new business also contracted for US factories.”
All the above explains the continued weakness for stocks as they logged their fifth straight session under the important level of 4,000. At this stage we seem to be on a crash course back to the bear market dividing line of 3,855 (20% below the all-time highs of 4,818).
On the one hand, I could see consolidation around that spot. And maybe a little trading range forming between there and 4,000.
On the other hand, investors are psychologically returning to the dark outlook that formed in June when we made new lows at 3,636. So that could actually be the near-term target instead.
Note that if this truly is a bear market...which I and the majority of investors now believe...then it's hard to truly think that 3,636 is the ultimate bottom as it is only 24% below the all time highs.
Remember that the average bear market endures a 34% decline from the previous highs. That would be more like 3,180.
Bear markets are far from cookie cutter and don’t want to pretend we can perfectly predict the bottom. My basic point is that this certainly seems to be a bear market. And if true, then there should be a lot more downside to come. And why our hedged portfolio strategy is just what the doctor ordered.
Besides the welcome gain on Tuesday, as the S&P 500 (SPX) fell another -0.41% we can see that it has been consistently producing gains as the market has sunk lower in previous weeks.
In fact, since we assembled the positions in the current hedged portfolio in mid-August, the S&P 500 has fallen -9.05% while we have enjoyed a much more pleasant +3.30% gain. I look forward to more of the same benefit rolling to members in the weeks and months to come.
As time rolls on we will start talking about market bottom strategies. That would include taking profits on our hedge and loading back up with great stocks for the inevitable reemergence of the bull market.
Yes, our first toe in that water will seem early. However, better to be early than late for young bull markets as they often explode off the bottom. Don’t want to miss too much of that glorious upside.
We are getting ahead of ourselves.
For now, let’s focus on the increasing odds of a more bearish downside and how the Reitmeister Total Return hedge will keep you on the right side of the action.
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Current Portfolio Holdings
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Portfolio Update
The inverse ETFs in our portfolio are performing admirably. And glad we rolled the dice with PSQ which is leading the way at nearly +13%. All is well here.
As for our stocks, yes we have some that have fallen a bit. But really not as much as the market averages. Even in the case of STM that is a Risk On tech stock that has not fallen as much as the tech-laden Nasdaq. So I could replace some of these picks as a form of window dressing...but they are all doing their job as intended inside the hedge (stocks as a whole falling less than market averages to create excess profit in the inverse ETFs).
If I were to make any move on the stock front it would be to remove a more aggressive stock like STM with a more conservative one like ACI.
Lastly, rates continue to go higher...same goes for risk of recession...and that is why RISR and SJB have been solid outperformers of late. As long as the Fed stays hawkish then they both make sense. And the more things look recessionary...the more SJB becomes one of the best trades around.
