Optimism abounds: Bear market rally or buyable bottom?

Bull and bear stock market price concept.

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what happened?

The better question is what hasn’t happened yet! Just a few short weeks ago, the prevailing view was that the Fed was well behind the curve.Powell needs big rate hikes to curb inflation Nothing like it has been seen in 40 years. Some even called for a 100-basis-point rate hike mid-session to shock the economy, pushing inflation at the heart of the proverbial “economic vampire”.

Still, the Fed’s goal of destroying demand appears to be well underway. Federal Reserve Chairman Jerome Powell appears to be getting what he wants. That’s why.

Inflation is easing, demand is weakening, consumer confidence is falling (which will continue to hit demand), and the S&P 500 (NYSE:spy) and Nasdaq (QQ) fell sharply, but appears to be stabilizing for now. What’s more, the 10-year is trading below 3% and credit markets appear calm enough.

What’s really interesting is that some of the most hawkish market participants, who had called for the Fed to raise rates at the fastest pace in 40 years, are now saying the Fed may need to put the brakes on soon.

What’s more, with the S&P 500 and the Nasdaq posting unprecedented losses over the past few months, we’ve had the good fortune of a nice rebound over the past week. In the following sections, we will do our best to determine if this is just another bear market rally or has bottomed out. We’ll also list signs that the demand disruption may be well underway. let’s start!

The market was slaughtered

The S&P 500 and Nasdaq have been under intense pressure over the past few weeks. The average share price fell 30%, while other stocks fell to all-time lows.

S&P 500 6-Month Chart

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S&P 500 6-Month Chart (look for alpha)

The S&P 500 has fallen for nine straight weeks. The index has not lost money for 99 consecutive years. When a sell-off of this magnitude occurs, a phenomenon known as the “wealth effect” is largely cancelled. When stocks go up and people feel good about their finances, they tend to spend more on discretionary items. However, when they see their hard-earned money starting to disappear before their eyes, they tend to tighten their belts. This has a direct impact on the demand for goods and services. The Nasdaq also fell. What’s more, it fell much deeper than the S&P 500.

Nasdaq 6-Month Chart

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Nasdaq 6-Month Chart (look for alpha)

Many Nasdaq stocks are down more than 50%, and some of them are down 75%, similar to what we saw in the dot-com bubble in 2000. However, both the S&P 500 and the Nasdaq rallied this week based on signs of demand destruction. Ongoing and inflation easing.

S&P 500 1 Week Chart

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S&P 500 1 Week Chart (look for alpha)

NASDAQ 1 Week Chart

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NASDAQ 1 Week Chart (look for alpha)

This Fed’s preferred inflation measureThis Core Personal Consumption Expenditure Price Index, or CPE, rose 4.9% year-on-year, in line with expectations, and has actually decelerated since March. This is likely due in large part to signs of weakness in several industries right now. Let’s review.

Demand destruction abounds

Property market weakens

had one Plenty of signs that the housing market is weakening. Nearly one in five (19.1%) homebuyers have lowered their prices in the past month, a sign that homebuyers are starting to reject all-time highs. In addition, pending home sales also fell 5.4% year over year. Additionally, new listings for homes for sale were down 0.9% from a year ago. Also, I can tell you from my own experience that as a licensed Texas Realtor, hitting 5% interest rates has put many people out of the market, while others have stopped buying altogether. The red-hot used car market also appears to have cooled.

Used car prices fall

cox car recently said The Mannheim Used Car Value Index, which tracks the prices of used cars it sells at U.S. wholesale auctions, fell 1% month-on-month. What’s more, wholesale auto prices are down 6.4% since their record high in January, a possible sign that the worst is over. The clearest example of demand destruction comes from the retail industry. Retailers were hit hard as they reported weak earnings and guidance across the board.

Retail earnings imploding abound

used to have Multiple Massive Implosions in Retail Stocks entire industry. Almost all retailers missed estimates and lower guidance. It was especially brutal for numerous mall stocks, all of which, including Ross Stores, suffered huge losses (Rost) fell 22%, Boot Barn (boot) 18% off, Footwear Carnival (SCVL) and Abercrombie & Fitch (ANF) each lost 14%, Chico’s FAS (CHS) and the Burlington store (Festival), both fell 13%, and Cato Corporation (Cato) and Urban Outfitters (city ​​network), each dropping 12%.

The decline wasn’t limited to mall stocks. Bath & Body Works (BBWI) dropped 24% to less than 5 (five) 19% off, Conn (Connecticut) down 18%, Best Buy (BBY) fell 16 percent, while Williams-Sonoma (WSM) by 14%. Discounters also took a hit from the Dollar Tree this week (DLTR) by 20%, Dollar General (dangerous goods) fell 19%, with big (big) by 18%.

Nonetheless, zeroing in on the retail collapse is the goal (TGT) tumbled 29% after its earnings and guidance blockbuster and warnings of a “rapid shift” in consumer demand. The retail giant’s slump, coupled with disruptions for retailers of all types, has sparked a general reassessment of the retail industry.

These sweeping losses are likely related to high inflation eating into Main Street’s wallet. However, there are signs that even persistently high employment rates may be starting to crack. That’s why.

Employment showing signs of weakness

At the heart of the sluggish jobs storm is the tech sector, which has boomed during the pandemic but is now showing signs of contraction.

Yuan (Facebook) Recently Announced Recruitment Suspension And scale back some hiring plans. In addition, Amazon’s (Amazon) CFO told analysts on the company’s earnings call Its warehouses have become “overcrowded” due to heavy hiring during the widespread lockdown, which has prompted consumers to increasingly shop online. Not just the biggest tech companies.Below is a Screenshot from CNBC segment Details all companies that currently mention that they are freezing or reducing hiring plans.

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companies cutting payroll costs (CNBC.com)

Uber’s (Uber) CEO told employees in a message obtained by CNBC that the company will “see hiring as a privilege and think carefully about when and where to increase headcount,” adding, “We will look at it more rigorously. full cost.”

In fact, all these developments have been going on for quite some time. Additionally, today’s CPE data suggests that we may be at an inflection point when it comes to inflation. So, let’s tie a bow to this piece and wrap it up.

Summarize

Based on strong signals of demand destruction such as weakness in housing, used car and retail markets and initial signs that both high employment and inflation may be slowing, I think there’s a good chance we’ve put in a bottoming out this week.

The Fed, on the other hand, still needs to shrink its $9 trillion balance sheet and plans to raise rates by 50 basis points each at its next two meetings. Furthermore, there is no guarantee that the Fed will achieve a soft landing, or that we will not end up in some kind of recession. I am on the fence. The main problem I have is that while demand seems to be being destroyed, with the big three on Main Street – rent, food and gas, it’s a supply issue.

Main Street Dilemma

I have a few friends who live every month, and like most Americans, they have to make tough choices with soaring rent, food, and fuel costs. This leads me to believe that at least a short and shallow recession is possible.

Over time due to the potential risk of a recession, I slowly took a position in my SWAN retirement income portfolio such as AT&T (Ton), Verizon (VZ), Ford (F), Bank of America(BAC) and Iron Mountain (Risk Management). I also bought partial positions like Tesla (Tesla) and Roblox (RBLX). I have Palantir (PLTR) on my watchlist. The message is, use weakness as an opportunity to buy an asset you think is selling, rather than selling at the bottom.

Final note

Investing in these highly volatile markets is an art. It needs to move into new positions over time to reduce risk. If the stock you’re interested in keeps going lower, you’re going to need a lot of dry powder.

Like my incredible uncle, Dr. Tony Clark, a submarine commander, scientist, and ghost whose exploits are documented in The Blind Man’s Bluff, which some say is the hunt for Red October by Jack The origin of Ryan’s character,” said, “You have to have perseverance and faith in the face of the storm. “

For me, this means having the courage to believe in what you believe in when starting a position. If you don’t really believe in what you’re investing in, you’ll inevitably sell when you should be layering or when the market forces you to. That’s why I always do my job on my own and only invest my hard-earned money to work for companies I trust. Here is a photo of my Uncle Dr. Tony Clark this Memorial Weekend as he was on a mission to the North Pole.

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Arctic Submarine Mission (personal)

These are my thoughts on the matter, and I look forward to reading yours.

Your input is required!

The real value of my article is the foresight of the Seeking Alpha members in the comments section below. Do you think this is a bear market rally or a buyable bottom? Why or why not? Thank you in advance for your participation.