Tuesday was the first trading session of the new year. In a funny way I thought it perfectly encapsulated the action of the past year, states Steve Reitmeister of Reitmeister Total Return.

Big surge higher > outright collapse > modest rally to cut losses, but still red in the end. Given all that extreme volatility it can easily confuse folks as to what happens next if they just use price action as their guide. Gladly we rely more heavily upon fundamentals to lead the way because it is the "True North" of investing.

Where are the fundamentals pointing now to start 2023? And what happens if that outlook proves to not be true? Answering those key questions will be the focus of our first Reitmeister Total Return commentary for the new year.

Market Commentary

Yes, RTR shows you one good way to tame the bear market. In fact, going back to February 2021 I have used this ten-minute-a-month approach to generate a real-life $104,390 gain in my Roth IRA portfolio. Yes, all the while the bear market ravaged most other portfolios.

The base case for this year has been shared in my recent presentation. That being a run-of-the-mill recession forming in the first half of 2023 with stock prices dropping close to the bear market average of -34% to a range of 3,000 to 3,200.

Then on Friday, I shared a new commentary about Best vs. Worst Case Scenario for the Stock Market. The point of this new article is to lay out contingency plans if things vary considerably from the expected plan. Now we are ready for whatever comes our way in 2023.

With this all in place I thought an interesting discussion today would be to review which deviation from the base case is most likely. Meaning, are we more likely to devolve into a much deeper bear market...or avoid one altogether?

I could make a strong case in either direction. But my greatest fear as an investor going into 2023 is that indeed it could be a soft landing with no recession and new bull market emerging as our portfolio is built to gain as the market falls (and thus miss out on some of the healthy gains in the early stages of a new bull market).

The fundamental case for this coming true is that there are solid signs of inflation abating, especially in commodities. Plus, the US consumer is shifting more money away from products into services in the post-Covid world. This action has given manufactures some relief to solve supply chain issues that will moderate prices down the road.

If this disinflationary story unfolds quicker than expected, then the Fed can pivot sooner to end the rate hike regime and become more accommodative. This will improve the mood of business people to restart the engines of the economy which investors will applaud with a new bull market. Note that this positive case has always been a possibility. I think the odds of devolving into recession and a deeper bear market are much more likely this year.

This next part is easy to say...but a little hard to fathom at first. So, hang in there with me and it should all make sense in the end. Over the years I have absolutely seen that the Market Gods love to make as many investors look foolish as possible. It’s kind of a Murphy’s Law for investing in that often things do not go as planned.

This is true for the formation of most bear markets as they come on the scene when far less than 50% of investors expect that outcome. And just as investors become the most pessimistic, is usually when things become bullish (climbing the wall of worry).

Now let’s consider 2023 where I have never seen this many people in agreement that a recession and bear market is on the way. Thus, the Murphy’s Law component could indeed have it play out the other way (soft landing...no recession...new bull emerging).

For as amusing as the above notion is to contemplate...I cannot give it more credence than my 40 years of experience reading the fundamental tea leaves that point to the economy and stock market devolving further in early 2023.

So that remains the base case with the contingency plans already outlined in my last commentary: Best vs. Worst Case Scenario for the Stock Market.

The abbreviated version of that plan is to remain bearish for now yet keep a close eye on inflation, economic growth, and Fed statements. If things are improving, and we break back above the 200-day moving average for S&P 500 (SPX), then time to shed the bear suit and become more bullish.

As for the first economic report of the new year, we saw PMI Manufacturing decline from a weak 47.7 to an anemic 46.2. This is the poorest reading since May 2020 when Covid was fresh on the scene and the economy collapsed.

One report does not a trend make. So, let’s continue to watch the other notable economic announcements in the days ahead like:

  • 1/4 ISM Manufacturing and FOMC Minutes
  • 1/6 Government Employment Situation and ISM Services
  • 1/12 Consumer Price Index
  • 1/18 Producer Price Index and Retail Sales

The more it spells inflation still too high and/or the economy faltering...the more bearish the outlook. And vice versa. So please continue to tune into my commentaries in the future to stay on top of the action in real-time and we will make appropriate changes to our trading plan to stay on the right side of the action.

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