It looks more and more like a recession is coming. This includes a dramatic drop for ISM Manufacturing discovered this morning. As you’re probably aware, most economists call manufacturing the “canary in the coal mine” for the US economy because it often shows weakness over other areas. In fact, the Atlanta Fed’s GDP Now reads it loud and clear with a negative revision for the US economy to -2.1% for the second quarter. Ouch! We’re going to discuss these new economic facts… what it means for the outlook for the stock market… and an interesting look at why the S&P 500 (SPY) isn’t falling in an orderly fashion. You’ll find all that and more in this week’s commentary….
Please enjoy this updated version of my weekly commentary.
Recessions and bear markets go together like peanut butter and jelly. And so we investors need to proactively watch for a recession at this point to confirm why the bear is in place and likely to further destroy stocks.
Unfortunately, Friday’s clues almost guarantee there’s a recession that investors should have.”watch out below” for more downward activity.
As mentioned in the intro, ISM Manufacturing was a serious disappointment today, coming in well below expectations at 53.0. Worst of all, the forward-looking New Orders component slipped into negative territory at 49.2.
All of this bad news was factored into today’s -2.1% reading of the Atlanta Fed’s second quarter GDP Now estimate. That’s a remarkable drop of just -1.0% yesterday. Let’s not forget that this model showed a growth of +2.5 in mid-May.
This clearly states that the economy has been heading in the wrong direction, report by report.
Now remember that the definition of recession is negative GDP for 2 consecutive quarters. So, since the first quarter has an anemia rate of -1.6%, that means investors were right to head for the hills early in the year.
So now we have a virtually confirmed recession that goes hand in hand with a confirmed bear market since 6/13 when we moved below the 20% decline line @ 3,855.
My guess is that the bottom will be somewhere between -30% (3,372) and -40% (2,891) as the average bear market leads to a 34% drop. Which means we haven’t seen the lows yet.
Now let’s move on to another interesting conversation that has been brought up to my many clients. If it’s so clear that we’re in a recession and a bear market…why does the S&P 500 (SPY) not descend in a more orderly manner?
For example, today, with even more evidence of recession in hand, the market ended up even higher. That just makes no sense on the surface. But if we dig a little more down, we’ll appreciate the circuitous road that supplies travel to their final destination.
First of all, we know that nothing with the market (SPY) is smooth. Since the advent of computer based trading it has massively increased the volatility with many more sessions in the plus or minus 1% camp.
However, the real problem is that there are so many different types of investors with so many different styles and points of view that smooth target alignment is never in the cards. For example, consider all these diverse investment aspects:
Long-term buy and hold traders versus swing traders with a 1-3 month time horizon versus day traders who trade in seconds and minutes.
Aggressive vs Conservative Investors
Growth vs Value vs Income vs Momentum Investors
Computer-aided quantitative models versus human decision-making
Fundamental investors vs. technical investors.
Even just in the realm of fundamental investors do you realize that economics is an imprecise science. So if you have 10 economists in the room, you probably have 10 different opinions.
Well, in recent decades, on average, only 40% of economists predict a recession before it arrives. This is why economists are often the butt of stock market jokes.
And the list of different points of view goes on and on. And this is why the S&P 500 (SPY) rarely goes up or down smoothly.
Back to the main point. This is a recession. And thus a bear market. Stocks falling in the coming weeks and months is the most likely outcome.
HOW, WHEN & WHERE do we find the soil is the great mystery. But as long as you appreciate the big picture of these things, you can adapt to the prevailing trends and find a way to perform better.
What to do?
Right now, there are 6 positions in my hand-picked portfolio that will not only protect you from an impending bear market, but also lead to big gains as the stocks fall.
This strategy fits perfectly with the mission of my Reitmeister Total Return service. That is to provide a positive return…even in the face of a roaring bear market.
Yes, it is easy to make money when the bull market is in full swing. Anyone can do that.
Unfortunately, most investors do not know how to generate profits when the market falls. So let me show you the way with 6 trades that are perfectly suited to the current bear market conditions.
And then we’ll take our profits on these positions and start bottom fishing for the best stocks to recover as the bull market delivers the rightful returns.
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SPY shares closed at $381.24 on Friday, up $3.99 (+1.06%). Year-to-date, the SPY is down -19.14%, versus a % increase in the benchmark S&P 500 index over the same period.
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.