Back on January 13th the stock market was falling like a knife towards the 100 day moving average for the S&P 500 (SPY) at 5,800 and we started our conversation on all the growing uncertainties causing me to raise a lot of cash in our portfolio.
Damn that looked foolish in the weeks that followed as stocks miraculously sprinted to new record highs at 6,147 by late February. This flied in the face of how investors reacted to tariff talks in 2018. Yet I kept that cash on hand as I knew it could just be early in the ballgame.
Voila...here we are falling all the way to test the 200 day moving average today with an intraday low of 5,732.
The real key is what happens next...and that will be the focus of today’s Reitmeister Total Return commentary.
Market Outlook
As noted in the intro, today we tested the technically important 200 day moving average for the first time in a long, long time.
(Yellow = 50 Day Moving Average / Orange = 100 Day MA / Red = 200 Day MA).
Certainly, increased tensions on tariffs are part of the mix. But even more concerning is how we went from WalMart warning on the consumer to news of the largest drop in Consumer Confidence in 4 years to discovery that the GDPNow model from the Atlanta Fed now stands at -2.8% for Q1 of this year.
This happened in 2 big stages.
First, was the Personal Income & Outlays report from 2/28 showing a dramatic drop in spending. In one fell swoop the model went from +2.2% to -1.5%. Next comes the ISM Manufacturing report today that pushed it all the way down to -2.8%.
I am not going to mince words. THIS IS NOT GOOD!
Never in my investment career have I seen this model move so quickly in any direction...let alone dropping into negative territory on the back of just 2 reports.
Then again...this is may not be as bad it sounds.
That same Personal Income & Outlays report from 2/28 showed that income is just fine. The problem is that spending is way down. I would say the main driver of that is the flurry of changes that have come from the Trump administration.
Remember that about half the population did not vote for him...a large % of those people are afraid of him...and their media outlet of choice is likely feeding them news that the world is falling apart with him at the helm.
This fear of what is happening now...and may happen in the future naturally causes people to be more cautious leading them to hold back on unnecessary purchases. That is how the economic picture changed so fast.
Worst case scenario is that it continues to devolve leading to recession and bear market.
Best case scenario...and most likely scenario...is that people get used to all the change. And start to realize that their worst fears are not coming true.
Since there job is still secure with new money flowing in, then they will soon spend that recent savings leading to healthy economic expansion.
The old adage is that the only things certain in this world are “death and taxes”.
Let me add a third element of certainty. The American consumer will spend every dollar in his wallet AND MORE.
Meaning all that extra savings being socked away will be spent at some point. Hopefully fairly soon as more people realize the sky is not falling. That should resolve the recent darkening of the economic outlook.
Let me add in that it was clear from Donald Trump’s first administration that he is very pro-business and pro-economy. And that he often used the growth of the stock market as a measuring stick of how much benefit he was providing to the economy.
Thus, it is my belief that higher tariffs are being used as a negotiating tool to get other countries to come to the table to find more reasonable accommodations to level the economic playing field. That may take another few months to come to fruition.
Plus there are plans to lower taxes for individuals and corporations that is most certainly stimulative.
Hard to be a bear when something as bullish as tax cuts are likely on the way.
Add it all up and certainty reigns supreme.
I think things will resolve in positive fashion with the economy and stocks bouncing higher. But I also appreciate that the odds of recession and bear market have just dramatically increased. Lets call it 35% odds up from 15%.
That still means 2X more likely that things roll bullish in the end.
In the meantime, volatility will stay in place. With likely more tests of the 200 day moving average (5,729) in play. And perhaps a stretch of time below before things improve.
That is why I am not currently putting our cash back in play on this dip as it could get worse before it gets better.
If things turn more clearly bearish, we will raise more cash by selling off our most aggressive positions...and might even add some inverse ETFs into the mix to make money on the way down.
More likely, as recent uncertainty becomes more positively resolved, then we put our cash to use in attractive Risk On stocks for the resumption of the long term bull market.
Yes, I appreciate that you would all like more conviction on this front as to what happens next. But anyone claiming to know precisely how this plays out is 100% full of (you know what).
Economics is an inexact science.
Politics and trade wars are an inexact science.
Investor reactions to new information is an inexact science.
Add those together and you appreciate why its about probabilities and not certainties at this stage. And as always as new facts emerge the probabilities change and we will change with them for the benefit of our portfolios.
What To Do Next?
Check out my portfolio with hand selected picks for the current market environment:
- 8 stocks to buy
- 1 stock to short
- 1 ETF to buy
All the stocks have been selected using the proven outperformance that comes from our POWR Ratings stock selection model which has done 4X better than the S&P 500 since 1999.
Now add in my 44 years of investing experience seeing bull markets...bear markets...and everything between. This helps me pick the right stocks for the current environment.
If you are curious to learn more, and want to see my current 10 recommendations, then please click the link below to get started now.
Steve Reitmeister’s Trading Plan & Top 10 Recommendations >
Wishing you a world of investment success!
SPY shares . Year-to-date, SPY has declined -1.57%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, 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 picks.
How Low Will Stocks Go? StockNews.com
