When I was young my family in the summer used to attend the local speedway. Amateur and Pro car drivers would run around the track at fast speeds. We would also be treated to the occasional demolition derby. Beat up cars would try and destroy the other cars until they were all inoperable but one, and that was the winner! Great fun.
Last week the markets continued lower in what has felt like a demolition derby of stocks with seven consecutive weeks of losses. Friday offered a glimmer of hope for the bulls in the last hour of trading when the indexes experienced a sharp rally as the shorts closed out positions before the weekend. By the closing bell, the Dow and S&P 500 had closed up on the day, and the Nasdaq recovered most of its almost 3% loss. Fast and furious.
The week was all about concerns of an oncoming recession. Other countries, including China, are reporting similar economic conditions. This has caused many investors to liquidate their holdings in the market and seek cash to preserve capital.
Bull or Bear Market?
As we pointed out in our prior Market Outlook, the economic conditions are all negative, for the most part.
Inflation is high and trending higher. Ongoing relentless price hikes (gasoline, food, staples, etc.) are causing demand destruction. This means consumers are starting to watch spending for luxury goods and services. Retailers and consumer staples companies had a very rough week (see Big View notes below)
Since early in the year, we have been warning of this possibility based on our Big View and various technical signals. Our Market Outlook posts this year have been advising readers to either subscribe to our investment models, Mish’s discretionary service, or consider cash as a position to preserve capital.
If you are a subscriber, then luckily you have benefited from our strategies rotating into commodity, energy, and market inverse instruments. This is how most of these strategies have delivered positive returns on the year.
The problem with labeling the current correction as an outright bear market is that overall earnings this quarter have been quite good. According to FactSet, 95% of companies have reported earnings, 77% have beaten expectations, and 73% have beaten revenue estimates. Until companies across the board report significant misses of their estimates (and a contraction of earnings), this may still be a bull market experiencing a stagflation mode with little upside. Defense is still warranted.
It is hard to label markets. Bear markets can be deceptive in many ways. A good example is March 2008 when the S&P was down approximately 20% and experienced a couple of sudden and dramatic up days that looked like a bottom to many investors. However, it took another 12 months before the actual bottom in March of 2009 (down 47%).
We still believe that we will see, sometime soon, a powerful and sudden rally to the upside. It is inevitable and necessary to work off what has become oversold conditions. Many investors may think it is the beginning of a new bull phase. Do not count on it. Please be careful. (See our suggested course of action below)
The Long View
It is important for investors to recognize that several things occurred leading up to the market’s peak in late 2021 that are now weighing on the market.
Click here to continue reading about what’s weighing on the markets, 8 ways to smooth your investment ride, and more.
Weekly Market Outlook
By Keith Schneider and Donn Goodman