There will be bounces here and there, just like last week… but don’t think for a second that this bear market is over, as the Fed is not done with its mission to contain the flames of the recession. When all is said and done, we will have a recession and the S&P 500 (SPY) will be much lower. This leads to the key question: Where is the bottom? Investment veteran Steve Reitmeister shares his thoughts in his updated market outlook below.
September ended brutally with a crescendo of sales sending the stock to the lowest levels of this bear market. Not surprisingly, this created ripe conditions for a 6% relief for the S&P 500 (SPY) to kick off October…how quickly that party was over.
On Thursday, investors took a modest step back. But then after hours we got word of a terrible earnings report from Advanced Micro Devices (AMD).
These are not just AMD issues. Unfortunately, it speaks of a widespread slowdown in computer products and supply chain problems that will undoubtedly hurt many in the industry.
Couple the above with a jobs report on Friday that was just a little too good and that investors know will encourage the Fed to continue to raise rates aggressively. This increases the chances of a hard landing for the economy down the road, forcing more investors to hit the sell button.
Long story short…welcome back to the bear market. Read the rest of the investment story and trading plan in the new commentary below…
Right now, investors are in a situation where they can’t win, as good news causes stocks to sell just as quickly as bad news. Yes, that’s kind of odd, but it’s in line with the general premise of…
Don’t fight the Fed!
When the Fed cut rates, as they did for nearly 12 years, we all used this saying as a rallying cry to stay optimistic. That’s because lower rates are a catalyst for economic growth, which is a great fuel for stock prices.
Now we have the opposite.
A Fed determined to extinguish the flames of inflation with the most aggressive rate hike policy in history. Which means the pace at which they’re raising rates is unprecedented.
The reason for this high rate is not only high inflation. Unfortunately, the Fed was sleeping at the wheel and citing early inflation”transientand therefore not something to be burdened with.
When the Fed finally woke up from the stickiness of this inflation, their only recourse was to aggressively raise interest rates. The goal is to slow down the economy, which by extension will tame inflation.
Or let me put it another way. Recession naturally leads to less demand. Anyone who has ever taken Econ 101 knows that it will lower prices and thus control inflation.
By putting these pieces together, the Fed is actively trying to create a recession. And yes, recessions and bear markets go together like peanut butter and jelly.
This explains why “Don’t fight the Fed!” now translates as “watch out below!” for share prices.
And this also explains why even good economic news is greeted with sales. The most recent example of this was Friday’s October Employment Report, which shows robust job growth, giving the Fed only the green light to continue raising interest rates aggressively.
The only real questions are how deep a recession will we be in and how far should stock prices fall?
Those betting on a soft landing would be right to think that the recent lows of 3,585 for the S&P 500 (SPY) seem like a reasonable floor for stocks, as it represents a drop of nearly 26% from all-time highs. .
Unfortunately, I have not yet spoken to anyone who asks for a soft bottom. Because the Fed is slow to react to inflation, they need to be more aggressive in the steps taken. Not only the rate at which they are raising interest rates, but also the phasing out of Quantitative Easing. (also known as quantitative tightening).
Most investors have forgotten about these.
Now they are winding down that huge balance sheet of $90 billion dollars a month. Again, let’s go back to our Econ 101.
When the Fed sells these bonds, it increases the supply of bonds. If demand is the same as in the past, this will of course lead to higher rates for attractive investors to buy the bonds. This is yet another way to slow down the economy.
Back to the point… where is all this going?
Unfortunately, the smart money has much higher rates and a much weaker economy and thus much lower stock prices.
Let’s not forget that the average bear market is experiencing a 34% drop in stock prices. That would equal 3,180 this time.
But the average bear market also goes hand in hand with a Fed cutting interest rates to help the economy recover. Now you have the exact opposite. So it probably points to a weaker economy and lower lows.
Second, if you have low bond yields, the stock market appears to be a more attractive investment by comparison. That is NOT true if the rates go higher.
Imagine a Treasury rate of 5-7%. That will be the safe choice for money investment. It is likely that corporate bonds will pay 2-3% above that.
It will be very tempting to take that safer path to investment returns. Especially if you think that interest rates will only fall in the future when it comes to the return on these bond investments.
This is another way of saying that demand for stocks at the end of this cycle will not be as strong as the typical recession and bear market. And so it’s not surprising to think that stocks will have to fall further to get more investors off the sidelines.
That is why you have to keep in mind that a decrease of 40% is not excluded. That translates to 2,891 for the S&P 500 (SPY).
No one rings a bell at the top or bottom. So perfect timing is not an option.
However, it does say that right now it is the wise choice to bet on stocks going lower…much lower.
What to do?
Discover my special portfolio of 9 easy trades to help you generate profits as the market descends further into bear market territory.
This plan has worked wonders since it kicked off in mid-August, yielding gains of +4.65% as the S&P 500 (SPY) fell more than 15%.
If you have successfully navigated the investment waters in 2022, don’t hesitate to ignore it.
However, if the bearish argument shared above makes you curious about what happens next… consider my updated “Bear Market Game Planwhich details the 9 unique positions in my timely and profitable portfolio.
I wish you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Right”)
CEO, Stock News Network and Editor, Reitmeister Total return
SPY shares fell $0.17 (-0.05%) in after-hours trading on Friday. Year-to-date, the SPY is down -22.73%, versus a % increase in the benchmark S&P 500 index over the same period.
About the author: Steve Reitmeister
Steve is better known to the StockNews public as “Reity”. Not only is he the CEO of the company, but he also shares his 40 years of investment experience in the Reitmeister Total Return Portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock selection.