The Weekend Edition is pulled from the daily Stansberry Digest.
A "snapshot" can tell you all you need to know...
Many folks likely know that we at Stansberry Research e-mail a pre-market snapshot to readers of our free Stansberry NewsWire service every morning. Written by NewsWire editor C. Scott Garliss, this rundown includes the key headlines, data, and other important market notes for the upcoming day.
And considering the nature of what we publish in the Stansberry Digest, it's one of the first e-mails I read before thinking about what to share with you each day.
The truth is, I could write about any number of angles that Scott covers in his morning market snapshot. And sometimes I do. But even on days where I don't include Scott's takes, I still find another powerful use for these reports...
That is, they tell us about the mood and the risks in the broader market.
For example, look at these excerpts from the May 25 NewsWire e-mail...
Federal Reserve Bank of Atlanta President Raphael Bostic said balancing the labor market's supply versus demand picture is the key to lowering inflation...
Economic indicators yesterday, including manufacturing activity for May and new home sales for April, pointed to slowing domestic activity, stoking global slowdown worries...
The European Central Bank's Financial Stability Review said regional asset risks have risen due to rising inflation and the increased potential for credit default.
I don't know about you, but these items don't sound good to me – particularly the last one. Europe is facing a major yet still underreported (in the U.S., at least) crisis related to the energy supply and the war in Eastern Europe.
After scrolling those notes, I read through the batch of mainstream financial headlines included in that same e-mail. Here are a few that caught my attention...
Inflation, rising rates curb global economic growth – Wall Street Journal. The latest business surveys underline the series of obstacles the global economy is facing this year, with some global companies beginning to plan for a significant slowdown or a recession.
Russia edges closer to default as U.S. lets key waiver expire – Bloomberg. Russia will get pushed closer to a potential default after the U.S. Department of the Treasury said it will let a key sanctions waiver benefiting American investors expire.
The next crisis to hit markets may be about liquidity – Bloomberg. Liquidity has been slowly draining from various markets to the point where the Federal Reserve this month warned that it threatens financial stability. Investors who ignore this warning do so at their own peril.
These headlines just about spoiled my breakfast...
But more relevant to our work in the Digest, they painted a grim picture of the broader markets today. It's a "fearful" time, in case you haven't heard – and for real, tangible reasons.
These notes aren't about "talking heads" spouting useless opinions... We're talking about facts – inflation and slowing economic growth around the world (and a potential Russian default, too). In a world of "fake money," these are real risks to asset prices...
A simple thought can be very powerful as well...
Some of you may be thinking, "I'm not scared" or "If we're living in a fearful time, shouldn't we be greedy?"
Some of you might also be tempted to buy a lot of stocks right now, like legendary investor Warren Buffett once suggested to do when everyone else is "fearful."
This idea jives, of course, with being a contrarian – which we like – and it can help you make money if and when the "herd is wrong."
But what if the herd is so wrong that it's right?
That's where we could be headed. Here's what I mean...
Simon Mikhailovich is the managing partner of The Bullion Reserve gold-investment firm. He has more than 35 years of market experience. In short, Mikhailovich is a smart person with a world of perspective.
He has been a guest of our editor-at-large Daniela Cambone on her terrific interview show.
Last Wednesday, Mikhailovich shared a powerful, short message on Twitter about two hot topics right now – the Federal Reserve and fighting inflation. He said...
The Fed is raising rates to beat inflation but this time higher rates may not work [because] supply of many critical commodities is constrained whereas demand is inelastic. Higher rates can destroy discretionary demand but not demand for necessities that may keep getting more expensive.
Mikhailovich is basically saying that what the Fed is doing in an attempt to lower inflation likely isn't going to work. He's not making a prediction... He's saying what "may" happen.
Raising interest rates, which makes borrowing costs higher, can lead to lower demand for discretionary items. But importantly, it won't reduce the prices of the essentials people rely on in their daily lives – like energy, food, or water.
In other words, prices of raw goods for the essentials – like gas or grains – are going to keep going up.
That gets us to the prevailing "recency bias" of today...
Depending on how you want to think of it, recency bias is either a "feature" or a "bug" in human nature. As our colleague Dr. David "Doc" Eifrig wrote in a June 2021 Digest...
Everybody struggles with "recency bias," in which we place too much importance on recent events and expect what has happened recently to continue happening. It's built into our psychology.
Thinking about the recent past can help us survive or not get hurt.
For example, should I walk into the electric fence that just zapped the guy in front of me? Not unless I want to meet the same fate.
But our brains can also make us think everything that has happened before will happen again...
That's why "surprises" is a word we use to describe unforeseen events. And it's why thinking about the prevailing recency bias leads us to go against the herd anyway.
Specifically, last June, Doc was talking about the idea that stock and bond prices have generally risen over the past 30 years – despite a few notable crises – in an era of "Great Moderation." By that, he means smaller inflationary booms and recessionary busts.
And Doc went on to say that one potential explanation for the Great Moderation was that policymakers like the Fed have gotten better at jiggering interest rates and bond buying. As a result, they're better at smoothing out the "business cycle."
Over the past several decades, more people have expected the Fed to step in and "do something" when market conditions sour.
Bailouts... Rescue plans... Bond-buying operations... Emergency interest-rate cuts to soothe the markets... We've seen them all. And now a lot of people have come to expect the markets to always just get rescued.
The conventional 60-40 stock-bond portfolio worked well over the past few decades... But not anymore. Anyone following conventional wisdom has taken a beating this year.
In the first quarter of 2022, the benchmark S&P 500 Index and U.S. government bonds lost more than 5% and more than 2%, respectively, for just the fourth quarter in the past 49 years.
This isn't "normal"...
Typically when central bankers have raised interest rates throughout modern economic-manipulation history, they've done it to cool a strong economy and prevent inflation from getting too high.
And that usually leads to some kind of economic slowdown or a recession. That can be healthy over the longer term... But like many things in life, moderation is key. At the extremes, things can get nutty.
Today, higher interest-rate policies are being put into place when we already have high inflation... and when economic growth was already likely to slow compared to last year.
Basically, Mikhailovich makes a great point...
Don't expect the Fed's interest-rate hikes to "work" or for a "save the day" market bailout to come anytime soon. And if one does happen, it will come later than you might expect.
In the meantime, we'll have higher prices throughout the economy – except for stocks perhaps.
Finally, a simple chart can be very powerful, too...
Circling back to Mikhailovich's point that a higher-interest-rate environment can primarily soften demand for discretionary items, take a look at the chart below from Steven Strazza, a technical analyst for investment-research provider All Star Charts.
As he wrote on Twitter...
He also shared a chart...
You can see that the last two times consumer discretionary stocks – as measured by the Consumer Discretionary Select Sector SPDR Fund (XLY) – dropped 20% relative to the S&P 500... the last two major market crashes followed not long after.
This recently happened again. Consumer discretionary stocks have been falling at a greater rate than the S&P 500. Even with a bump over the past week, they're down more than 25% since the start of the year. The S&P 500 is down 13%.
Now, this doesn't mean another broad crash is definitely going to happen (though you could argue we're already in a slow-motion one). But at the very least, this does get our attention as a leading indicator...
First, any type of correlation between market behavior from before the dot-com bubble and the financial crisis is worth noting when so many people today are fearful of another market crash.
Furthermore, this fund's top five holdings are Amazon (AMZN), Tesla (TSLA), McDonald's (MCD), Home Depot (HD), and Nike (NKE). That's a good cross section of companies that sell things that people don't really need... but want.
Combine this information with the idea that policymakers' moves might dampen demand for discretionary spending but not lower inflation for other essential items, and it suggests legitimate reasons to be cautious with stocks today.
In the end, it's sometimes best to keep the takeaway simple...
First, Mr. Market is fearful. You can pick up on that by reading a snapshot of the markets. To that point, my first recommendation would be to sign up for our free NewsWire service if you haven't already.
You'll get Scott's morning market outlook and a whole lot more – like intraday updates on stocks that our Stansberry Research team has recommended across our investment universe and up-to-the-minute news and trends moving the markets each and every day.
Second, today's market environment is not "normal." To be clear, I'm not saying, "This time is different."
On the contrary, I'm saying it's more of the same – the Fed using the same inflation-fighting playbook. But it's happening in an environment we haven't seen in 40 years, when inflation was last rising at the rate is has been for the past year.
Finally, now probably isn't the time to get greedy just yet. There are times to "back up the truck" and buy stocks whole-hog. But based on what enough of our editors have been saying lately and what we're seeing... now is not one of those times.
We still don't know what the course of inflation will look like in the year ahead. We also don't know how companies will fare with higher costs, generally speaking. Plus, I don't think Wall Street institutional investors have priced all of this in yet.
But if you do come across a good investment opportunity, remember that you don't have to go "all in." For instance, you could allocate half the money you normally would to a particular position. That way, you'll limit your risks in case your situation sours.
In general, position sizing is something most new investors don't think about. But it can – and should – vary based on how much volatility you're willing to stomach, your financial goals, and your investment timeline.
Above all else, always know which way the wind is blowing. And don't try to fight it. At the very least, we're far from a raging bull market.
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