The Weekend Edition is pulled from the daily Stansberry Digest.
The churn continues...
As Ten Stock Trader editor Greg Diamond put it in his Weekly Market Outlook for his paid subscribers on Monday morning...
Let's not mince words... The price action across the stock market is a mess right now.
He hit the nail on the head. On the surface, there appear to be a lot of mixed signals – and returns – in the stock market right now...
The small-cap Russell 2000 Index – which has a substantial weighting to financial stocks – has been trading near a yearly low. It's roughly flat since the start of 2023, after a 7% drop in the days after the Silicon Valley Bank run.
Meanwhile, the tech-heavy Nasdaq Composite Index is up 16% since New Year's Day. Enough investors (or speculators) are starting to get giddy at the thought of potential Federal Reserve rate-hike cuts later this year, which many folks are sure would boost growth prospects.
In the middle is the benchmark S&P 500 Index, up roughly 6% year to date. It's trading just above its 200-day moving average (200-DMA), a technical measure of a long-term trend.
Then the Dow Jones Industrial Average's performance makes things even messier, down about 1% for the year.
If you're wondering what to make of the markets today, you're in good company. In this essay, I'll explore what investors appear to be weighing right now... and what it might mean for your portfolio.
Last weekend, we read a great series of Twitter messages...
David Cervantes – the founder of New York's Pine Brook Capital Management and a prior guest on our Stansberry Investor Hour podcast – discussed a "dislocation" in the markets.
It's a topic that speaks to the leading uncertainties in the market today, like whether we'll have a recession and what the Fed will do if that happens.
To start, David pointed out that the Atlanta Fed GDPNow forecast is estimating 3.2% annualized growth of U.S. gross domestic product ("GDP") for the first quarter of 2023. Another indicator he looks at suggests 2.4%. For the sake of argument, he settled on the market expecting 2.8% GDP growth for the first quarter.
Meanwhile, the Fed's official forecast for "real" GDP growth for the entire year is 0.4%. This raises a bunch of questions. As David said...
In order for us to even come close to that Fed forecast number, GDP must come in negative for the remaining 3 quarters of the year. Roughly -.5% GDP. Every quarter. For the next 3 quarters...
He said he's not so sure that will happen, particularly because of the slowdown we've already seen from past rate hikes and the state of the labor market today. But these low expectations could lead to some surprisingly bullish scenarios...
We can twist ourselves into knots to say yes it does , but that assumes some pretty crazy stuff. From 2.8% to -.5% in 1 quarter is some borderline sudden stop kind of stuff. With a labor that is white hot. Fine. It can happen.
Then ask yourself, what's the Fed's reaction function to a sudden stop kind of event? Is that reaction politically tenable?
We can dance around in circles to validate or invalidate the Fed forecast according to our biases. But that doesn't matter.
What matters is the disconnect between implied growth and realized growth and the subsequent impact on asset prices.
If we don't have a sudden stop, the chances of growth just downshifting as described above are slim. That means growth is under priced. It means the Fed is right regarding no rate hikes in 2023.
It means the yield curve is likely to violently reprice if realized growth comes in higher.
On the other hand, David wrote that a sudden slowdown would likely "pack a bigger punch" that leaves the U.S. economy with worse than 0.4% real GDP growth for the year. If this is the case...
It means the Fed forecast is full of beans and the is over optimistic. It means the Fed needs to be cutting yesterday.
There's a camp of investors that is betting on rate cuts from the Fed in the second half of the year...
Many of these investors think inflation will continue to slow and things will get substantially worse for the economy as the lag effect of the central bank's rate hikes hits the real world.
These folks didn't believe Fed Chair Jerome Powell when he recently said that the central bank isn't even considering rate cuts right now... These investors are betting on a Fed "pivot" before the Fed has indicated it will happen.
On the other hand, say the Fed does what it says it will do and holds its benchmark lending rate near its "terminal" rate of around 5% for the rest of the year. The Fed will be able to do that because there hasn't been a full-fledged crisis that needs an emergency response of a rate cut...
In that case, the Fed's projected economic slowdown probably also won't have materialized, considering the GDP projections for the first quarter that we're seeing today.
In other words, forget "hard landing" or "soft landing." This will be like "a landing"... and a world of higher interest rates and the consequences that come with that.
So what should you do?
First, you need to know why you're investing in the markets and what your goals and time horizon are.
Are you betting money you need in six months or six years from now? You'll probably do things differently depending on your answer. Start there before doing anything else... Only then can you make appropriate decisions.
Aside from that, here's my view: We're certainly not experiencing a raging bull market... But it's not looking like last year's loud, roaring bear market, either... when anything and everything was down across the board.
There are some signs of optimism, mainly given the declining pace of inflation. And that looks like it's going to continue...
As our Stansberry NewsWire team shared with us this week, recent Fed surveys on "prices received" by manufacturing businesses – which have been a leading indicator of the Consumer Price Index ("CPI") – continue to decelerate from last summer's peak...
All in all, this is good news...
The backdrop of decelerating inflation has been a constant for months. To be clear, I'm not saying that this means there is no inflation. As long as we have fiat currency, we'll have inflation. But it has been rising more slowly than it was for the past two years.
The question, however, is what kind of knock-on damage we might see as a consequence of the Fed fighting the inflation war. Investors are feeling justifiable fear, too, given the regional banking panic we've just seen... concerns of a credit crunch... and broad weakness in the labor market potentially ahead.
If you agree with the Fed and believe that the economy isn't going to grow much this year, you probably expect a recession in the second half of the year. But as David suggested, if that kind of slowdown doesn't materialize (which it hasn't just yet) and the Fed is wrong (always a decent bet), that means growth may be "underpriced" today.
However, some growth stocks and tech stocks have run up recently – even hitting pre-pandemic valuation levels – which is more reason to be cautious.
If all of this is making your head spin, here's a suggestion...
If you ever needed another reason to own the type of high-quality companies that many of our editors typically recommend, this scenario we're looking at today is one of them.
Now, nobody has a crystal ball. But in the end, not all companies are going to thrive or even survive in a serious recession or a higher-interest-rate world... even if that recession isn't as brutal as folks expect it to be.
Heck, as we've recently seen, some banks couldn't even survive the early days of higher rates, including one with a Fed regional board member as its CEO.
In times like these, opportunities will crop up – if you know where to look. You'll also encounter sectors and stocks to avoid. Simply put, you don't need to be "all out" or "all in."
You're less likely to go wrong if you own shares of companies that generate tons of free cash flow... that can reward shareholders... and that continue to grow their businesses. These companies will have strong balance sheets and sell always-in-demand products.
On the other end, staying away from the duds of the world can be just as valuable. If a recession doesn't clip these names first, a higher-rate environment will eventually spoil their fortunes – especially the "zombie" companies of the world that can't even afford to pay the interest on their debt today.
One way to separate the winners from the losers...
It pays to have help in an environment like this. That might mean heeding the advice of editors and analysts you already follow... or perhaps looking at a valuable tool like the Power Gauge.
This is a proprietary system created for individual investors by Marc Chaikin, the founder of our corporate affiliate Chaikin Analytics.
Marc put together everything he has learned from four decades on Wall Street into this easy-to-use tool. The Power Gauge analyzes thousands of stocks, with a simple "bullish," "bearish," or "neutral" rating that can be applied to individual names, sectors, indexes, or exchange-traded funds ("ETFs").
What's more, Marc recently went on-air to explain how some niches of the market have quietly turned bullish lately...
In a free presentation last week, he shared his outlook on the topics we discussed today, like the Fed and the possibilities of "growth" versus "recession." He also covered what he believes are the best places to invest right now.
For those who might not know, Marc predicted the possibility of a bank run four months ago... And he's the only person I saw make that prescient statement.
So, if nothing else, you ought to consider what's on his mind today. You can check out his discussion right here.
As you set out to pick your winners and stay away from losers, plan your path forward like a savvy investor...
Once you spot the discrepancy in the market, weigh the possible outcomes and evaluate what investments might benefit or suffer in those cases. Then make bets accordingly... and stay away when those bets aren't worth the risk.
That's the surest way to save your portfolio from big losses.
All the best,
Editor's note: The recent run on the banks ignited new fear in investors... But Wall Street legend Marc Chaikin believes now is not the time to panic. In fact, one of the key indicators he uses to time the markets just triggered. Marc recently hosted a free event – with a special guest at his side – to explain exactly what he sees ahead... and to reveal one specific strategy that can help you take advantage of it. If you missed his urgent message, click here to watch the replay right now.