Optimism Abounds: Bear Market Bounce or Buyable Bottom?

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What happened?

The better question is what hasn’t happened! Just a few weeks ago, the prevailing view was that the Fed was way behind the curve. Powell needed to raise rates substantially to quell raging inflation on like they haven’t seen each other in 40 years. Some are even calling for a 100 basis point hike midway through the meeting to shock the economy, thus driving a stake through the heart of the proverbial “economic vampire” that is inflation.

Nonetheless, it appears that the Fed’s demand destruction goal may already be underway. Fed Chairman Powell appears to be getting exactly what he wants. This is why.

Inflation is moderating, demand is weakening, consumer confidence is falling (which will continue to weigh on demand), and the S&P 500 (NYSEARCH:SPY) and Nasdaq (QQQ) are down substantially, but seem to be stabilizing for now. What’s more, credit markets look calm enough with the 10-year trade below 3%.

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

Also, with the S&P 500 and Nasdaq posting unprecedented losses in recent months, we have been blessed with a nice rebound over the last week. In the following sections, we do our best to determine if this is just another bear market bounce or if the bottom has been reached. We will also present the signs that demand destruction may be underway. Let us begin!

massacred markets

The S&P 500 and the Nasdaq have been under heavy pressure in recent weeks. Average stocks are down 30% and others hit record lows.

S&P 500 6-month chart

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S&P 500 6-month chart (Looking for Alpha)

The S&P 500 has fallen for nine weeks in a row. A losing streak not seen in the index for 99 years. When sell-offs of this magnitude occur, a phenomenon called the “wealth effect” is basically taken off the table. When stocks rise and people feel good about their financial position, they tend to spend more on discretionary items. However, when they see their hard-earned money start to melt away before their very eyes, they tend to tighten their belts. This has a direct effect on the demand for goods and services. The Nasdaq is also down. Furthermore, it has sunk much more than the S&P 500.

Nasdaq 6 month chart

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NASDAQ 6 month chart (Looking for alpha)

Many stocks on the Nasdaq fell more than 50% with some seeing 75% declines similar to what we saw in the 2000 dot-com bubble. However, both the S&P 500 and the Nasdaq rose this week on indications that demand destruction is underway and inflation is moderating.

S&P 500 1-week chart

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S&P 500 1-week chart (Looking for alpha)

Nasdaq 1-week chart

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NASDAQ 1-week chart (Looking for alpha)

The Fed’s preferred gauge of inflation, the core personal consumption expenditures price index, or CPE, rose 4.9% year-over-year, was in line with estimates and has, in fact, slowed since March. This may be largely due to several sectors showing signs of weakness at the moment. Let’s review.

Demand destruction abounds

The real estate market weakens

There have been a plethora of signs that the real estate market is weakening. Nearly one in five (19.1%) home sellers have lowered their price in the past month, suggesting that home buyers are beginning to reject historically high prices. Additionally, pending home sales also fell 5.4% year over year. Additionally, new home listings for sale fell 0.9% from a year earlier. Also, I can tell you from my own experience as a licensed Texas real estate agent that rates as high as 5% have driven many out of the market, while others have stopped purchases altogether. The sizzling used car market appears to have cooled off as well.

Used car prices drop

Cox Automotive recently stated that its Manheim Used Vehicle Value Index, which tracks the prices of used vehicles sold at its US wholesale auctions, decreased 1% month over month. Additionally, wholesale vehicle prices sank 6.4% from the all-time high set in January, which may indicate the worst is over. The most obvious example of demand destruction comes from the retail sector. Retailers in general have been hit by weak earnings and guidance across the board.

Retail Earnings Implosions Abound

There were multiple massive implosions in retail stocks across the sector. Nearly all retailers missed estimates and lower guidance. It was especially brutal for a multitude of mall stocks, all suffering big losses to include Ross Stores (ROST) down 22%, Boot Barn (BOOT) down 18%, Shoe Carnival (SCVL) and Abercrombie. & Fitch (ANF), each with a 14% loss. %, Chico’s FAS (CHS) and Burlington Stores (BURL), both down 13%, and Cato Corporation (CATO) and Urban Outfitters (URBN), down 12% each.

The declines weren’t just limited to mall stocks. Specialty and discount retailers were also hit hard, led by Bath & Body Works (BBWI) down 24%, Five Below (FIVE) down 19%, Conn’s (CONN) down 18%, Best Buy (BBY) down 16% and Williams-Sonoma (WSM) down 14%. Discount stores were also hit for the week with Dollar Tree (DLTR) down 20%, Dollar General (DG) down 19% and Big Lots (BIG) down 18%.

Ground zero for the retail meltdown, however, was Target (TGT), which imploded 29% following its earnings pump and guidance and warning of a “rapid turnaround” in consumer demand. The massive nosedive of the retail giant, coupled with the devastation across all types of retailers, triggered a reassessment of the retail sector as a whole.

These widespread losses are likely related to high inflation consuming high street wallets. However, there are signs that even the persistently high employment rate may be starting to crack. This is why.

Employment shows first signs of weakness

The heart of the storm regarding employment weakness is the tech sector, which grew during the pandemic but is now showing signs of contraction.

Meta (FB) recently announced that it is pausing hiring and scaling back some hiring plans. Additionally, Amazon’s (AMZN) CFO told analysts on the company’s earnings call that its warehouses have been “overstaffed,” following a huge hiring spree during widespread shutdowns that led to consumers becoming increasingly again to buy online. It’s not just the biggest tech companies. Below is a screenshot from a CNBC segment detailing all the companies currently mentioning that they are freezing or reducing their hiring plans.

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Payroll Cost Reduction Companies (CNBC.com)

The CEO of Uber (UBER) told employees in a message obtained by CNBC that the company would “treat hiring as a privilege and be deliberate about when and where we add staff,” adding: “We will be even tougher on costs.” usually. ”

The fact is that all these developments have been underway for quite some time. Also, the CPE figures released today indicate that we may be at a turning point when it comes to inflation. So, let’s make a bow on this piece and wrap it up.

the recap

Based on strong signs of demand destruction exemplified by weakness in the real estate, used car and retail markets, coupled with early indications that the high level of employment and the rate of inflation may be moderating, I argue that there’s a good chance we’ve put in a fund this week.

On the other hand, the Fed still has a $9 trillion balance sheet to unwind and plans to raise rates by 50 basis points at each of the next two meetings. Furthermore, there is no guarantee that the Fed can handle a soft landing or that we will not eventually slip into a recession of some magnitude. I am on the fence. The main issue I have is that while demand seems to be destroying itself, it’s a supply issue with regards to the big three on High Street: rent, food, and gas.

main street problems

I have several friends who live month to month, as most Americans do, and have to make tough decisions with their rent, food, and fuel costs skyrocketing. This leads me to believe that a short and shallow recession, at the very least, may be on the table.

Due to the potential risk of a recession, I am slowly adding positions in my SWAN retirement income portfolio over time, such as AT&T (T), Verizon (VZ), Ford (F), Bank of America (BAC) and Iron Mountain (IRM). I also bought partial positions in battered speculative stocks with strong growth histories, such as Tesla (TSLA) and Roblox (RBLX). I have Palantir (PLTR) on my watch list. The message is, use weakness as an opportunity to buy assets that you think are for sale, rather than selling them at the bottom.

Final note

There is a great art to investing in highly volatile markets like these. It involves layering into new positions over time to reduce risk. You want to have a lot of dry powder if the stock you are interested in continues to drop.

Like my amazing uncle, Dr. Tony Clark, submarine commander, scientist, and ghost whose exploits were documented in the book “Blind Man’s Bluff,” and some say was the genesis of the Jack Ryan character in “The Hunt for Red October”. ”, He said, “In the face of the storm you must have strength and faith”.

For me, this translates to having courage in your convictions when starting a charge. If you don’t really believe in what you are investing in, you will inevitably sell during times or market duress just when you should be betting. That’s why I always do my own due diligence and only put my hard-earned money. to work in companies in which I believe. Here is a photo in tribute to my uncle, Dr. Tony Clark, on this Memorial Weekend when he was on a mission to the North Pole.

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North Pole Submarine Mission (Staff)

Those are my opinions about it, I hope to read yours.

Your input is required!

The true value of my articles is provided by the prophetic comments from Seeking Alpha members in the comments section below. Do you think this is a bear market bounce or a buyable bottom? Why or why not? Thanks in advance for your participation.

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