No News Is Bad News

July 6, 2022

They say the last day before you go on vacation is the most productive. Well, this is that day for me.  Headed to Ireland for 9 days. Trip that was paid for in 2020, I’m sure just like most people. I’m going to call it an educational trip, as I hope to attain my Guinness pourers certification. Vacation is not what it used to be as I’ll be totally connected through out the trip, and I have an eager eye on earnings that will start to come in late next week, all leading into the inflation number for June that will be released on July 13.

I’m more and more convinced that this current pattern cannot be broken till we get positive data on inflation starting to come down, and the Fed’s comments become less hawkish. Last month’s inflation reading was the highest we have had in a few decades, which is undoubtedly the result of “Everybody Gets Money”. 

So, between now and the release of the data points, no news is bad news. The market seems to be looking for reasons to sell off, and that in itself is a bullish signal.

A majority of the pundits if not all have already concluded that we are either already in or will soon be in a recession. You can’t live in denial forever, so I will jump on to this wagon and agree that we may already be in one. So here I will give you all the bad news at the same time which will be my attempt to rip the band aid off all at once. 

Bear markets that coincide with recessions are on average deeper, last longer and drag down earnings to a greater degree than do non-recessionary bear markets. Some of the technicals that I follow are not showing the normal signs that bottoms generally put in, such as the Vix® Index® hasn’t spiked. So short term I think this there may be some more pain to come. A typical recession sees earnings on the S&P 500 contract 22%, and if I use my current forecast of earnings this year of $230, then that new target would be around $179.   

Now on a positive note, if we do see earnings come down to that level then the multiple when the earnings actually trough is on average up 75%. Meaning when earnings have troughed the stock price has already moved. So, for example if we use 16 times as a low on my $179 of earnings and we then put the 75% to that multiple, then that gives the S&P 500 a price of 5012. Up 33% from where we are today.

No idea what I’m talking about correct? Remember the market is the ultimate “PRE-PRICER” of all commonly known things. It’s not looking at data today, it’s trying to forecast what it will be 3-24 months in advance, and that’s the price it puts on it. This is why I always say you cannot apply logical thinking to a stock market. This is why engineers are typically terrible at investing. (Apologies to the engineers out there). Extremely intelligent people trying to apply logic to something that operates on anything but. 

More good news when looking at previous recessionary markets. In 4 of the 10 of them, markets had already bottomed at this point. The bottom 3 markets I don’t believe we can compare to now, however as we financing companies that didn’t exist in 2000 and loaning money to anyone who said they were making money in 2008. This time is the attempt of federal governments trying to put the brakes on something they created, by over stimulating the economy from a lock down. The job market is strong and continues to be. We are not seeing the mass layoffs that you normally see in a recessionary economy….(Well not yet anyway).

All in all, I am sticking to the thesis that we are still setting up for a good second half of the year, culminating in gridlock politically, and a positive 3rd year of a Presidential cycle. Again, please don’t read this as a measure of where I sit politically. I’m just stating fact. See my article on 3rd year of Presidential cycles. And for the record, I hate them all equally.

With that said, here’s the Buy/Sell.

Mick Graham, CPM®, AIF®
Branch Manager Raymond James
Financial Advisor Melbourne, FL

Any opinions are those of Mick Graham and not necessarily those of Raymond James.  Expressions of opinion are as of this date and are subject to change without notice.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Investing involves risk and you may incur a profit or loss regardless of strategy selected. Individual investor’s results will vary. Past performance does not guarantee future results.

The CBOE Volatility Index® (VIX® Index®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Charts are for illustration purposes only and not intended to reflect the actual performance of any particular security. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

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