Steve Reitmeister is on no account a permabear…however its exhausting for him to surrender his economics background and switch away from the bearish proof in hand. Nonetheless, with the S&P 500 (SPY) up greater than 20% from the October lows its time for some sincere reflection of the present bull vs. bear case. That’s what one can find beneath together with a buying and selling plan for the weeks and months forward.
The S&P 500 (SPY) has been consolidating round 4,400 early in July after an enormous rally to finish June.
On the floor that doesn’t sound so spectacular. Gladly beneath the floor cash is rotating out of overblown mega caps into small and mid caps. That enhancing market breadth is a really bullish signal.
But not every part is bullish. There are nonetheless a whole lot of indicators that time decidedly bearish. Which altogether makes issues VERY CONFUSING.
I’ll do my finest to offer a good and balanced evaluate of what’s occurring now so we are able to chart our course ahead.
Market Commentary
Let’s evaluate what’s bullish presently.
Worth Motion: At first many buyers shrugged off the information that this was a brand new bull market given a better than 20% rise from the October backside of three,577. That’s as a result of nearly all of the positive factors had been accruing to the Magnificent 7 mega caps whereas most smaller shares had been simply treading water.
Over the previous month that image has enormously improved resulting in extra positive factors throughout extra inventory teams:
No Recession at This Time: Buyers preserve listening to about the opportunity of recession but with the overwhelming majority of related Q2 financial information in hand, the US financial system continues to muddle alongside.
This features a +2.3% prediction from the famed GDPNow Mannequin from the Atlanta Fed. The Bluechip Economists panel sees issues a bit extra subdued at +1.3%…however that prediction is up from solely +0.8% a month in the past. So, there could also be extra upside in that quantity earlier than it’s introduced in late August.
Jobs-A-Loads: Plain and easy, with out job loss there isn’t a recession. And as of the latest month-to-month employment studies we’re seeing ample job provides that preserve the unemployment charge close to historic lows.
Now let’s juxtapose that versus an attention-grabbing slate of indicators that also level decidedly bearish.
Inverted Yield Curve: You understand this is without doubt one of the most constant indicators that factors to future recessions as you will notice within the chart beneath:
Be aware that EVERY TIME the yield curve inverts {that a} recession follows. And now admire that the yield curve is probably the most inverted it has been for the reason that early 1980’s when the market was riddled with recessions and bear markets. Arduous to see that an not give it critical credence.
Don’t Struggle the Fed: That is everybody’s favourite chant when the financial system goes within the dumpster and the Fed lowers charges to enhance the financial system. That is additionally a magical tonic for inventory costs.
But now now we have the precise reverse the place the Fed is proactively stepping on the brakes of the financial system to stamp out the flames of excessive inflation. Even now 16 months into their charge hike cycle the work is just not accomplished with seemingly 2 extra will increase to come back beginning with the July 26th assembly.
Fed officers have been extremely clear that they might somewhat have a recession than enable inflation to change into entrenched. Taken one other approach…they’ll preserve elevating charges till they get inflation beneath management. This additionally provides up while you admire that 12 of the final 15 charge hike cycles led to recession.
Now admire that probably the most persistent type of inflation, is wage inflation given an impressively sturdy employment market. So for the Fed to win the ultimate battle over inflation they seemingly should preserve elevating charges til there’s job loss. That may be a Pandoras Field that when opened often results in a lot better job loss > recession > bear market.
That means that the present constructive of a robust labor market is what is going to truly preserve the Fed working time beyond regulation to reverse course so as to bury excessive inflation as soon as and for all. This matches in with Steve Liesman’s assertion on CNBC that the Fed is “going to maintain elevating charges til they break one thing.”
Who’s Proper and Who’s Flawed?
The basic bearish case is compelling…however the constructive value motion is difficult to disregard. And really on daily basis that there’s not destructive information the pull of FOMO rally has extra folks bidding up shares presently.
Thus, quite a bit is dependent upon the following set of market transferring occasions similar to:
7/12 CPI Report: Not simply the headline yr over yr comparability issues. Buyers have to look into the present tempo of inflation that’s higher seen in month over month information. In addition to the composition of Sticky vs. Versatile inflation elements. This report will inform give buyers extra clues about how a lot tougher the Fed should struggle to finish excessive inflation.
7/26 Fed Price Hike Conferences: It’s a forgone conclusion that the Fed will probably be mountaineering charges one other 25 foundation factors on the assembly. So what actually issues is the statements and hawkish tone of Powell on the press convention that follows. If he nonetheless thinks this charge hike cycle ends with a recession then buyers ought to most likely hear up.
Q2 Earnings Season: Earnings expectations are very low with Wall Avenue predicting a 12% yr over yr decline in company earnings. But going ahead buyers are presently anticipating an earnings rebound that many assume is a bit too optimistic.
So the actual key to this earnings season is just not the % of firms that beat or miss expectations in Q2. Slightly, it’s earnings estimate revisions to future quarters that can have the best influence on inventory costs.
On that entrance, let me share with you the latest feedback of famous earnings professional, Nick Raich from EarningsScout.com:
- Inflation and Fed financial coverage stay the important thing drivers for future company earnings and in the end inventory costs.
- With hopes for rate of interest cuts fading as the tough actuality the Fed will preserve rates of interest greater for longer, we’re measuring weakening EPS estimate revisions among the many early 2Q 2023 reporters.
- In whole, 15 out of the primary 18 S&P 500 firms reporting 2Q 2023 had their subsequent quarter EPS estimates fall afterwards.
- With no rate of interest cuts on the horizon and a charge hike anticipated later this month, it’s uncertain that S&P 500 EPS expectations will see any enchancment this earnings season.
- Our recommendation? Keep underweight shares
And My Buying and selling Plan Is…
With my economics background, and the teachings of historical past, there isn’t a approach for me to not see the present setting as essentially bearish.
Then again, I can’t deny some facets of the bullish story. Plus how usually the constructive value motion of shares is a number one indicator of a flip in financial information as a result of it improves sentiment and buying selections that spur the financial system.
This retains me in a balanced portfolio posture that’s roughly 50% invested within the inventory market. Nonetheless, the shares that I’m centered on are small caps which might be lastly beginning to take the baton from mega caps to guide the pack. That means shopping for the Magnificent 7 and outpacing the market sport plan of the primary half of 2023 is performed out…time for worthy others to guide.
As extra information emerge it would change into extra obvious if the market is actually bullish or bearish. With that can come applicable modifications to my funding technique. My hope is that the bull story wins out and very happy to get again to gung ho bullish investing.
Nonetheless, if the bear is certainly going to come back out of hibernation, then we have to modify in that path. That features promoting our latest winners to lock in earnings earlier than they shortly get wiped off the boards.
What To Do Subsequent?
Uncover my full market outlook and buying and selling plan for the remainder of 2023. It’s all obtainable in my newest presentation:
2nd Half of 2023 Inventory Market Outlook >
Simply in case you might be curious, let me pull again the curtain a little bit wider on the principle contents:
- Overview of…How Did We Get Right here?
- Bear Case
- Bull Case
- And the Winner Is??? (Spoiler: Bear case extra seemingly)
- Buying and selling Plan with Particular Trades Like…
- High 10 Small Cap Shares
- 4 Inverse ETFs
- And A lot Extra!
If these concepts attraction to you, then please click on beneath to entry this important presentation now:
2nd Half of 2023 Inventory Market Outlook >
Wishing you a world of funding success!
Steve Reitmeister…however everybody calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Whole Return
SPY shares rose $0.03 (+0.01%) in after-hours buying and selling Tuesday. 12 months-to-date, SPY has gained 16.57%, versus a % rise within the benchmark S&P 500 index throughout the identical interval.
Concerning the Writer: Steve Reitmeister
Steve is healthier recognized to the StockNews viewers as “Reity”. Not solely is he the CEO of the agency, however he additionally shares his 40 years of funding expertise within the Reitmeister Whole Return portfolio. Be taught extra about Reity’s background, together with hyperlinks to his most up-to-date articles and inventory picks.
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