(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).
It’s been nearly a month since stocks tested the bear market lows. A lot of that has to do with the very welcome decline in commodity prices including lower prices at the pump.
This has some investors contemplating if the bear market is now over. Well...IT AINT!
Yes, I appreciate that simple statement is not a convincing argument. So let me spend more time spelling it out in this week’s Reitmeister Total Return commentary.
Market Commentary
First things first...did you see my POWR Platinum presentation from Monday 7/11?
If not, then you should do that now as I covered a wide range of important topics such as:
- Why still a bear market
- How much lower we will go
- Bear market bottom lessons from history
- Best resources to tame the bear market
- And much more...
Assuming you watched the webinar above...now let’s pick up the story from there. That being mounting evidence that we are already in recession. And if true, which it certainly seems to be, then appreciating the next shoe to drop in the bear market process.
That being a likely earnings recession on the way. A growing number of experts are pointing out that the Q2 earnings season will likely ignite a round of estimates cuts from Wall Street analysts. Truly these analysts have been late to the party in appreciating the true state of the economy and how current earnings estimates are far too high.
Meaning now is not a time that we will enjoy peak earnings. The economy is weak and thus earnings will take a logical step backwards.
The above only makes sense if indeed the economy is faltering. So after a surprisingly weak -1.6% read for Q1 GDP we are not looking much better in Q2. According to the most respected model, Atlanta Fed’s GDPNow, we are looking at -1.2% for Q2.
2 quarters of negative GDP = Recession
That equation means that Corporate America is not doing as well. That should be on full display this earnings season and second half of the year.
This is not as much about the beat/miss nature of Q2 earnings. Rather the key lies in the guidance these companies give for the future. Note that indications from the early reporters already points to this reduced outlook being the case.
Now let’s appreciate that the average recession brings about a 26% decline in S&P 500 (SPY) earnings. I suspect this recession will be a tad milder than average and likely only see a 15-20% earnings reduction.
However, even that milder earnings recession has NOT been factored into current share prices as Kara Murphy, Chief Investment Officer of Kestra Holdings said in the quote below:
"Markets had priced in already a fair amount of this earnings slowdown, but they've not priced in an earnings recession. We're not at a point where we could say the market is cheap."
To be clear an earnings slowdown = slowing of growth.
Earnings recession = lowering of earnings estimates. And since that likely is soon in the offing, then stocks have to come down more to accommodate that weakened outlook.
Next up let’s consider the NFIB Small Business Optimism Index which came out Tuesday morning at 89.5 which is the lowest reading since January 2013. Even worse, 61% of the business owners expect business conditions will deteriorate over the next 6 months.
That is the lowest recorded level in the 48 year history of the survey. Yes, lower than during Covid or the Great Recession.
Now let’s add to the mix what bond investors are telling us by the recent inversion of the yield curve. That being where the 10 year Treasury rate of 2.97% is lower than the 2 year rate of 3.05%. This signal is considered VERY BEARISH as it has preceded so many recessions and bear markets.
Yes, I for one have pointed out in the past that the signal is distorted by the Fed compressing long term rates. But month by month they are taking their foot off the neck of those rates and they are starting to float closer to real market values. So this bearish signal is becoming more and more meaningful.
Add it up and the writing is in the wall. We are in recession and the full weight of that outcome is not accounted for in the current earnings outlook.
When that outlook dims...so too will the outlook for stocks pushing stocks to fresh lows during this bear market cycle. That is why I continue to have a mix of 4 inverse ETFs that rack up gains as the market heads lower.
Somewhere between 30-40% decline from the all time highs of 4,818 we will likely find bottom. That would be a bottom between 2,891 and 3,373. Yes, a wide range, but every bear market is different.
The key point is that with the S&P 500 (SPY) currently at 3,818 then it is not too late to employ these strategies to profit from the bear market before we switch gears to bottom fishing the best values for the emergence of the next bull market.
Let’s not get too far ahead of ourselves as that is likely 3-6 months down the road. For now, it’s a bear market and best to trade accordingly.
What To Do Next?
Get my “Bear Market Game Plan!”
Right now there are 6 positions in my hand picked portfolio that will not only protect you from a forthcoming bear market, but also lead to ample gains as stocks head lower.
Like the ample gain our members enjoyed in June as the market finally tumbled into bear market territory.
This unique strategy perfectly fits the mission of my Reitmeister Total Return service. That being to provide positive returns…even in the face of a roaring bear market.
Come discover what my 40 years of investing experience can do you for you.
Plus get access to my full portfolio of 6 timely trades to not just survive...but thrive in this brutal bear market environment.
Wishing you a world of investment success!
SPY shares fell $0.03 (-0.01%) in after-hours trading Tuesday. Year-to-date, SPY has declined -19.22%, 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.
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