3 important points to keep an eye on in the current market
Every Friday Steve Reitmeister (Reity) and I sit down to talk about the week and how we feel about the stock market (SPY). Normally the two of us are pretty in sync – we’ve both been pretty bearish for months now. But last week it looked like that was about to change. “Are you bullish now?” he asked. I think my answer to his question surprised him. Read on for what I said – and why… I think the results will surprise you too….
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(Enjoy this updated version of my weekly commentary originally published Jan. 20e2023 in the POWR Shares Under $10 Newsletter).
Market Commentary
Now, for those of you who have also read my POWR Growth newsletter, this is a bit of a refresh, but I thought it pretty much summed up my final thoughts on where the stock market (SPY) currently is, and what we need to see next to change things.
So, back to Reity’s question: am I bullish now?
The answer is… it’s complicated.
I’ve been pretty bearish for the past six or seven months.
Fed Chair Jerome Powell made it pretty clear that inflation was enemy #1 and that the central bank would do anything to get prices under control. I mean come on; his main buzzword was “pain.” It wasn’t a good time to be anything for long.
And as we saw in 2022, Powell meant what he said and he said what he meant. Equities paid the price, falling nearly 20%.
We ended the year feeling sorry for our “no show” Santa meeting and sighing over the number of analyst forecasts for poor earnings and a coming recession.
And then we flipped our calendar year and started looking things up. The S&P 500 (SPY) is up nearly 4% in just a few weeks. And the price can’t lie. Clearly someone is buying.
So, what’s the deal? Did someone forget to send the memo that we went from bear to bull?
It certainly looks better than we collectively expected at the end of December.
Am I actually bullish? Not special. But I’m not particularly bearish either.
If you ask me, I think we’re somewhere in between. Things are not roses and lollipops… but they are not about to collapse either.
Yes, we still have inflation and a Fed threatening to raise rates further… but we also have three consecutive months of reports showing that inflation is on a downward trend.
We have an inverted yield curve… but we also have economist Campbell Harvey saying that the famous (and highly accurate) recession indicator could be wrong this time. That is very bad; Harvey is the man who linked inverted yield curves to recessions in the first place.
We have huge missed revenues, like this week’s report from Goldman Sachs… and then big gains, like this week’s reports from United Airlines and Netflix.
And don’t forget it bullish green shoots I featured in last week’s issue…
Things are complicated, y’all!
But I see three potential turning points/pivot points that could somehow make things a lot less complicated.
1) Things (economic data/revenues/current events) turn negative.
One reason I think people might buy now? We’ve set the bar very, very low. Going into the year, we expected disaster. But so far things have been pretty neutral, which means they’ve been great!
But if this is just a bear market rally, I think the first sign of negativity could spoil the party and scare off investors. And then we’re back to everything, just being the worst.
But what if we get bad news and investors just shrug it off? Or if we continue to see more of these economic ‘green shoots’ in subsequent reports? Then yes, I think we could be looking at a new bull.
2) The labor market is finally improving.
The ‘consumer’ will continue to consume as long as the job picture remains rosy. That is certainly another factor driving stock prices right now. Many people argue that we “can’t” have a recession because the labor market is too strong.
This is, of course, a poor “bull market” indicator to rely on, as employment lags most other indicators. Of course, if employment remains tight, people will continue to spend and the Fed will likely get the “soft landing” they’ve been looking for.
But we could be well on our way to the next leg lower before we see any weakness in job numbers, as employment is a lagging indicator.
That’s why it’s hard to hang your hat on the job posting data.
(Oh, and we’ve seen some weakness in job numbers. Just ask anyone you know who works – worked? – in the tech industry, where a number of major companies have laid off several thousand workers. This week, Alphabet announced that it laid off 12,000 jobs this quarter.)
3) The S&P 500 breaks above 4,000…and stays there.
This is currently an important psychological resistance level in the market. In the past week, the S&P 500 managed to get THIS CLOSE to the close above 4,000… only to fall short of pennies.
Why is that number important? It theoretically doesn’t. What does matter is that we haven’t gotten over it now – several times. So now, as stocks begin to approach 4,000, buyers wonder if they’re buying too high… and then all buying interest dries up.
If investors had a strong belief that the S&P 500 would continue to climb above 4,000, they would definitely buy. The fact that we can’t break that level means there isn’t enough bullish conviction. In order for the market to pick up again, we have to break through that barrier.
Until we do…or until we see the results of one of these two other potential turning points, things are likely to remain complicated.
Even in the best-case scenario – no recession, mixed earnings, a pause in rate hikes – I don’t see anything pointing to a market boom. Prices are still increased. Supply chain issues are still very real.
Companies are still warning investors not to expect much growth this year. It’s probably not going to be a 30% profit year…
Conclusion
The bottom line is that we are in the purgatory of the market. The potential of a recession hangs over our heads… and over the market. Earlier this week I even heard an analyst say it would be better to have a recession and just get it over with.
Until we see the market go one way or the other, we’re probably still holding about 40% of our capital in cash and the rest in quality stocks under $10. That means that in addition to adding a few new picks, I will try to sell some of our positions when they make big profits.
That way we can continue to drive their force upwards, but are protected against major changes in direction.
What to do now?
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Best!
Meredith Margrave
Chief Growth Strategist, StockNews
Editor, POWR Newsletter Stocks Under $10
SPY shares closed Friday at $395.88, up $7.24 (+1.86%). Year-to-date, SPY has gained 3.52% versus a percentage increase of the benchmark S&P 500 index over the same period.
About the author: Meredith Margrave
Meredith Margrave has been a well-known financial expert and market commentator for the past two decades. She is currently the editor of the POWR growth and POWR shares under $10 newsletters. Learn more about Meredith’s background, along with links to her most recent articles.
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