I ask because everywhere I look, I see analysts and gurus proclaiming that yesterday’s “bearish” action was the start of a major collapse.
There’s just one problem with this… MOST of the market rallied yesterday.
I’m not making this up… over 400 of the 500 companies in the S&P 500 finished the day UP yesterday. The reason the market fell at all is because big tech, which comprises 30% of the market’s weight, dropped hard.
In fact, the overall market breadth (a measure of internal market strength) actually erupted to new all time highs yesterday.
Does this look like the start of a major collapse to you?
This is why you have to be so careful when someone starts spouting off bearish arguments based on stocks dropping. It’s so easy to panic and sell… when the dip might in fact be a MAJOR buying opportunity.
Case in point, a LOT of people sold in April when the market corrected just ~5% (a totally healthy correction in the context of a bull market). The S&P 500 has since rallied over 600 points. Anyone who sold in April MISSED OUT on making some serious money!
Remember, as investors, our job is to make money, not look for any excuse to dump stocks and panic about something bad happening. And as I’ve outlined in recent articles, this means riding bull markets for as long as possible, and then side-stepping bear markets when they eventually hit.
In the very simplest of terms, you need to be invested in stocks, until an objective, verifiable tool (not your feelings or limiting beliefs) tells you it’s time to “get out.”
I’ve developed a tool that takes ALL of the guessing work out of this problem. With just one look at this tool, you can tell whether it’s a good time to buy stocks or not. I detail it, along with what it’s currently saying about the market today in a Special Investment Report How to Predict a Crash.
As I outlined yesterday, as an individual investor, there are two things you NEED to focus on:
1) Ride bull markets for as long as possible.
2) Get out of stocks once a bear market hits.
If you do this, you WILL get wealthy from investing over time.
I bring this up, because I’m seeing more and more analysts arguing that the bull market is about to end and that a raging recession will crater stocks.
I don’t see what they are seeing. If anything, stocks look ready to go to new highs of 5,800 or even higher by year end. Please note, I’m not saying there won’t be dips and corrections along the way… I mean that this is a bull market, and if anything it’s getting stronger.
One of the primary criticisms of this bull market is that it’s being driven by just a handful of stocks: the big tech plays like Amazon, Alphabet, Nvidia, etc. Meanwhile, the other 495 stocks that comprise the S&P 500 are trailing behind.
This actually makes perfect sense. The big tech companies are the most profitable companies in history. Collectively, Amazon, Nvidia, Microsoft, Meta, and Alphabet generated $116 BILLION in cash flow in 1Q24.
That’s roughly $1.28 BILLION in cash flow… per day.
Again, there’s a reason by the big tech companies lead the market: they’re the largest, most profitable companies in history. They should lead the market!
The key item is whether the rest of the market plays “catch up” or if big tech rolls over. And throughout this bull market begun in October 2022, the rest of the market has played “catch up.”
Take a look at the first leg higher from October 2022 to June 2023. At that time, the regular S&P 500 which is heavily weighted towards tech and is represented by the black line in the chart below dramatically outperformed the equal weighted S&P 500: a version of the S&P 500 in which each company receives 1/500th weighting as represented by the blue line in the chart below.
Then, just like now, stock market bears and misguided gurus were out proclaiming that the stock market was about to collapse because it was “held up by only a handful of stocks.”
Then the rest of the market played “catch up” and the market roared to over 5,000 within eight months.
So again, the fact that big tech is leading the market… and makes up the bulk of its gains isn’t necessarily a BAD thing. If the rest of the market plays catch up… as it tends to do… the bull market will continue MUCH LONGER than most analysts expect.
Remember, as investors, our job is to make money, not look for any excuse to dump stocks and panic about something bad happening. And as I’ve outlined in recent articles, this means riding bull markets for as long as possible, and then side-stepping bear markets when they eventually hit.
In the very simplest of terms, you need to be invested in stocks, until an objective, verifiable tool (not your feelings or limiting beliefs) tells you it’s time to “get out.”
I’ve developed a tool that takes ALL of the guessing work out of this problem. With just one look at this tool, you can tell whether it’s a good time to buy stocks or not. I detail it, along with what it’s currently saying about the market today in a Special Investment Report How to Predict a Crash.
As an individual investor, there are two things you NEED to focus on:
1) Ride bull markets for as long as possible.
2) Get out of stocks once a bear market hits.
If you do this, you WILL get wealthy from investing over time.
Consider the last 35 years. The investor who simply bought stocks regardless of whether they were in a bull or bear market experienced a 17 year period in which he or she made NO money from their investments.
The reason?
The bear markets from 2000-2003 and 2007-2009. The losses generated by those five years’ worth of bear markets resulted in 17 years of ZERO gains from the markets.
See for yourself… from 1996 through 2013/2014, stocks went nowhere. Anyone who invested during this time grew his or her portfolio via contributions NOT market gains.
Again, as an individual investor you can’t just ride bull markets. You also need to avoid bear markets.
If you did that over the last 35 years, you achieved the gains from the green rectangles, and didn’t give back those gains during the bear markets in between. And you got rich in the process.
Remember, as investors, our job is to make money, not look for any excuse to dump stocks and panic about something bad happening. And as I’ve outlined in recent articles, this means riding bull markets for as long as possible, and then side-stepping bear markets when they eventually hit.
In the very simplest of terms, you need to be invested in stocks, until an objective, verifiable tool (not your feelings or limiting beliefs) tells you it’s time to “get out.”
I’ve developed a tool that takes ALL of the guessing work out of this problem. With just one look at this tool, you can tell whether it’s a good time to buy stocks or not. I detail it, along with what it’s currently saying about the market today in a Special Investment Report How to Predict a Crash.
Yesterday, I noted that Uncle Sam effectively is the economy… for now.
What I meant by this is that the government is hiring so many people and spending so much money, that it is stopping the economy from rolling over into a recession.
By quick way of review…
Since, mid-2021, public sector job growth has outpaced private sector job growth.
Government transfers (social spending) accounted for 40% of the growth in income in 1Q24 and was the single largest contributor to personal income growth in 20 states.
It is VERY difficult for the U.S. economy to roll over into a recession with this going on. But this economic “prop” is coming at a cost.
The U.S. is issuing a staggering amount of debt to hire all these people and pay out all this money. The Biden administration has already added $7 trillion in new debt and is adding a new $1 trillion in debt every 100 days.
Put simply, assuming President Biden completes his first term, he will have presided over the largest debt expansion in U.S. history: a jaw dropping $9 trillion.
At some point, this is going to be a REAL problem, particularly when you consider that a massive amount of debt that was issued when rates were around zero will come due in the next 24 months.
With rates now over 5%, the U.S. will be forced to pay a lot more money in interest payments when it goes to roll over this old debt.
How much more money?
Interest payments on the national debt are expected to clear $870 billion this year and $1 trillion in 2025. That would make interest payments the single largest government outlay.
In very simple terms, starting next year, Uncle Sam’s will be paying his debtors MORE than he pays Americans via social security.
How will this play out? That remains to be seen. But one thing is clear: all this money printing is stopping the U.S. from rolling over into recession. And this is boosting stocks.
To whit, the stock market has hit a new all-time highs in four of the last five weeks. This is a RAGING BULL of a market, and investors NEED to ride it for as long as possible until the music stops.
Why?
Because when the next recession hits, the market will lose 20%-30% and be DEAD money for at least nine months.
After all, as investors, our job is to make money, not look for any excuse to dump stocks and panic about something bad happening. And as I’ve outlined in recent articles, this means riding bull markets for as long as possible, and then side-stepping bear markets when they eventually hit.
In the very simplest of terms, you need to be invested in stocks, until an objective, verifiable tool (not your feelings or limiting beliefs) tells you it’s time to “get out.”
I’ve developed a tool that takes ALL of the guessing work out of this problem. With just one look at this tool, you can tell whether it’s a good time to buy stocks or not. I detail it, along with what it’s currently saying about the market today in a Special Investment Report How to Predict a Crash.
In the coming weeks, you’re going to hear a LOT about the Sahm Rule.
The Sahm Rule is an indicator that has accurately predicted every recession since the 1960s. In its simplest form, the Sahm Rule compares 3-Month Moving Average for the unemployment rate to the lowest unemployment rate in the prior 12 months.
If the difference between the two numbers is 0.5% or greater, it indicates a recession has begun.
As I mentioned a moment ago, this indicator has predicted every recession since 1960. The below chart shows the Sahm Rule measure (blue line) as well as historic recessions (gray bars). You can see its accuracy for yourself.
I bring all of this up, because the current Sahm Rule reading is 0.37%. And it is HIGHLY likely this metric will hit 0.4%, if not 0.5% some time this summer.
When this happens nearly every guru and strategist on the planet is going to start proclaiming that a recession is here. And they are going to start telling their clients to “sell the farm” on their stock portfolios.
However, for those of us who are interested in making REAL MONEY from our portfolios, it’s important to note that there is a BIG difference between the U.S. today and the U.S. during prior periods in which the Sahm Rule triggered a recession warning.
That difference?
Claudia Sahm, the creator of the Sahm Rule, notes that the U.S. has added 3.3 million people in net immigration in 2023. To provide some context, the U.S. added just 900,000 on average every year from 2010-2019.
As Sahm noted to Business Insider, the immigration process is time consuming. As a result, many immigrants are unable to legally find work after entering the labor force.
The end result?
The number of unemployed people jumps rapidly, resulting in a higher unemployment rate, which will trigger a Sahm Rule recession warning. But this jump in unemployment rate is due to immigration not people who were working losing their jobs.
Put simply, the coming Sahm Rule signal (or at the very least warning) is likely to be a false positive, meaning that it is NOT actually signaling a recession has arrived.
This will make it the EIGHTH false positive for a recession indicator during this business cycle. You’d think after seven false positives that people would begin to catch on that things are different this time.
After all, as investors, our job is to make money, not look for any excuse to dump stocks and panic about something bad happening. And as I’ve outlined in recent articles, this means riding bull markets for as long as possible, and then side-stepping bear markets when they eventually hit.
In the very simplest of terms, you need to be invested in stocks, until an objective, verifiable tool (not your feelings or limiting beliefs) tells you it’s time to “get out.”
I’ve developed a tool that takes ALL of the guessing work out of this problem. With just one look at this tool, you can tell whether it’s a good time to buy stocks or not. I detail it, along with what it’s currently saying about the market today in a Special Investment Report How to Predict a Crash.
Stocks hit new all-time highs last week… but you wouldn’t know it from the mood on social media and financial TV!
It’s truly incredible to watch… the markets have been on a historic run, with the S&P 500 rallying 1,400 points since the November 2023 lows. And yet, throughout this period, the overall mood amongst market participants seems anxious if not outright worried.
Everywhere you look, there’s talk of a potential recession… or concerns about geopolitics… or claims that Artificial Intelligence (AI) stocks are in a massive bubble that is about to burst.
And yet, the markets keeps charging higher, with every dip being bought. Those who fretted about the countless number of things that could go wrong have made nothing. Those who focused on making money and stayed invested in stocks have seen their entire portfolios increase by over 33%!
Which brings us to #2: trying to calling a top.
Please understand, I’m not trying to make fun of people who are cautious or conservative with their investments. But at some point, if you’re looking to make real money with your investing, you need to focus on what works and ignore feelings/ worries that don’t contribute anything to your net worth.
I’m talking about thoughts like…
1) This stock has gone up a lot, so it must be in a bubble.
2) This is the top!
3) The market is rigged!
NO ONE got rich from any of those three concepts. If your goal is to make money from your investments, you should remove all three of them from your investing vocabulary.
Let’s break down all three.
Regarding #1, since going public Apple (AAPL) has looked “bubbly” countless times. Heck, it was up 20,000% in 2018. And yet, if you focused on the fact AAPL had gone up so much, you missed out on the run to 200,000% gains!
Which brings us to #2: trying to calling a top.
No one… I repeat, NO ONE has ever gotten rich from calling a top. A small handful of people have gotten rich from crashes or bear markets… but most if not ALL of investors (including the legends) got rich from riding bull markets or bull moves in individual stocks.
Indeed, every bull market is nothing more than a series of “tops” which are then taken out by new highs. If you’re obsessed with calling a top and getting out of stocks, you’re guaranteeingyou won’t see future gains. Put another way, your obsession is limiting your profits.
Which brings us to #3 in our list: claiming that the market is rigged.
The reason people claim this is because time and again it looks as if stocks are going to break down only to reverse and ramp higher. But if you dig a little deeper into this way of thinking, you quickly realize that it means the person who is angry that the markets refuse to collapse secretly wants something bad to happen to the markets.
Understand, I’m not saying that the markets aren’t manipulated. Anything that involves a lot of money or power breeds corruption and manipulation. But getting angry because stocks refuse to break down badly is bad for your physical health, your mental health, and your portfolio.
As investors, our job is to make money, not look for any excuse to dump stocks and panic about something bad happening. And as I’ve outlined in recent articles, this means riding bull markets for as long as possible, and then side-stepping bear markets when they eventually hit.
In the very simplest of terms, you need to be invested in stocks, until an objective, verifiable tool (not your feelings or limiting beliefs) tells you it’s time to “get out.”
I’ve developed a tool that takes ALL of the guessing work out of this problem. With just one look at this tool, you can tell whether it’s a good time to buy stocks or not. I detail it, along with what it’s currently saying about the market today in a Special Investment Report How to Predict a Crash.
As an investment strategist, I get asked this question all the time. On the surface, it sounds as if the person is interested in making money from the stock market.
Having worked in finance for over 20 years, I’ve come to realize that when someone asks me this, what he or she is really saying is that they believe stocks are too risky for investing. After all, during the course of my career the markets have experienced three MAJOR crises. And who wants to put his or her money into an asset class that can lose 30% in a matter of weeks?
Let’s start with the basics of stock market investing.
Stocks are essentially a means of investing in human innovation. Nearly every stock trading on the stock market represents someone’s life work to build a better product/service. Sure, there is the occasional fraud or company that manages to go public without actually producing anything of value, but for the most part, the stock market is the closest thing to betting on human ingenuity/ innovation.
Now, humanity gets a lot of things wrong. But when it comes to inventing/ creating/ developing things, it’s RARELY a good idea to bet against us. For this reason, over the long-term, stocks tend to go up a LOT.
See for yourself.
So why not simply buy stocks ALL THE TIME?!?
Because, during the occasional periods in which stocks DON’T go up… they either A) lose a LOT of money or B) go nowhere for ~20 years.
See for yourself. I’ve illustrated those periods in which stocks didn’t do well with red rectangles in the chart below.
Thus, investors are in a quandary.
One the one hand, stocks tend to go up a LOT over the long-term. But on the other hand, there are periods in which stocks do NOTHING for ~20 years.
Thus, the focus for ANYONE looking to invest in stocks is to determine whether stocks are in a strong bull market… or if they are about to enter a prolonged period of ZERO returns.
I’ve developed a tool that takes ALL of the guessing work out of this problem. With just one look at this tool, you can tell whether it’s a good time to buy stocks or not. I detail it, along with what it’s currently saying about the market today in a Special Investment Report How to Predict a Crash.
Everywhere I look on social media, the defining narrative is that the stock market is in a massive bubble that is about to burst, triggering a devastating crash.
The dirty little secret about the people pushing these narratives is that they have never actually called a crash. Instead, they’ve been bearish for years and years, and like a broken clock, they’ve been right once or twice. And I can guarantee you they didn’t make ANY MONEY from a market crash when it DID happen.
Let’s start with the basics here.
Crashes, DO happen, but they are RARE. There have been THREE in the last 35 years:
1) 2000-2003
2) 2007-2009
3) February-April 2020
Bear in mind, I’m talking about REAL crashes here or full-scale crises, not garden variety corrections of 10%. I’ve illustrated the crashes of note in the chart below.
Again, there were just THREE major financial catastrophes in a 35 year period, or roughly one every 10 years or so. That’s quite rare. Name another “1 in 10 years” event that people obsess about to this degree. I can’t. People get worked up about buying new homes or changing careers, both of which are “1 in 10 years”-type events… but I don’t see entire Youtube Channels and social media accounts that talk non-stop about those events the same way I see people obsessing about market crashes.
Again, when we talk about crashes, we’re talking about “1 in 10 years” events!
Even if we were to include EVERY time the market dropped more than 10% in rapid fashion, the number of “events” in the stock market is less than 10. Even if I missed a few here, you’re still talking about a “1 in 3 years” event.
Meanwhile, throughout this 35 year period, in spite of these crashes/ events, stocks rose nearly 2,000%. Anyone who obsessed about crashes to the point of avoiding stocks completely, or even worse, betting on a collapse non-stop, missed one of the greatest periods of wealth generation in human history.
So why not simply buy stocks non-stop and hold for the long-term?
Because when crashes DO happen, stocks can take YEARS before they hit new highs.
Consider the period from 1996-2013. There were several MAJOR bull markets that saw stocks generate huge returns. Unfortunately, the subsequent bear markets/ crashes ERASED most if not all of those gains. As a result of this, stocks didn’t make a cent for 17 years!
Thus, investors are in a quandary.
One the one hand, crashes are rare events. And obsessing over them can lead to missing out on creating generational wealth from your investments.
However, on the other hand, when crashes DO happen, they can lead to 10+ years of ZERO returns for long-term, buy and hold investors. What are the odds that a REAL person would be willing to sit through a period like that and not despair?
Likely ZERO.
So obviously, investors need a tool of avoiding crashes, while riding bull markets for as long as possible.
I’ve developed PRECISELY such a tool. I detail it, along with what it’s currently saying about the market today in a Special Investment Report How to Predict a Crash.
The stock market is setting up to offer a buying opportunity in the next week or two.
The S&P 500 hit a new all-time high last week. Every dip was bought as the markets finished the week in a solid “risk on” framework.
However, beneath the surface, several market leading indicators show a dip is coming…
High yield credit, which has led every turn for stocks in the last four months, has rolled over. As I write this Monday morning, it suggests the S&P 500 will fall to 5,300 in the near future. This is just a “dip” and we see it as a buying opportunity.
Breadth, another market leading indicator, is saying the same thing direction-wise. But it suggests the dip will be slightly deeper with the S&P 500 dropped to the 5,200s . The fact both breadth and high yield credit are saying the same thing, adds weight to the forecast for a risk off move.
Will this risk off move open the door to something worse? Could stocks crash some time in the near future?
To answer those questions, I rely on certain key signals that flash before every market crash.
I detail them, along with what they’re currently saying about the market today in a Special Investment Report How to Predict a Crash.
The S&P 500 looks primed for a correction of sorts.
As I’ve noted previously, the S&P 500 is quite extended above both its 10-week moving average (same as the 50-DMA) as well as the 40-week moving average (same as the 200-DMA). Historically, this degree of extension above both trendlines has marked a temporary top as the below chart illustrates.
Beyond this, NO sector is outperforming the S&P 500 at this time (maybe with the exception of Communication Services).
Below are three charts showing the ratio performance between each sector in the S&P 500 and the broader index. When the individual sector outperforms, the line rises. When the individual sector underperforms, the line falls. As you’ll note, NO SECTOR is leading the market higher right now.
Tech, Healthcare, Consumer Discretionary and Financials:
Communication Services, Industrials, Consumer Staples, and Energy.
Utilities, Real Estate and Materials:
Looking at the above ratios, we note that Tech, Consumer Discretionary, Financials and Real Estate lead the market higher during the rally from early November until the end of 2023. However, today, not one single sector is leading the overall market higher (maybe with the exception of Communication Services). Even the Tech sector, which usually is a market leader has been underperforming the broader index since January.
So how has the market held up despite every sector underperforming?
A handful of stocks have pulled the overall market higher. Specifically, Nvidia (NVDA), Amazon (AMZN), Meta (META), and Eli Lilly & CO (LLY). Remove those companies from the S&P 500 and stocks are effectively flat.
Add it all up, and the above analysis suggests that “under the surface” the S&P 500 could see a decent correction of 5% or more in the coming weeks. Only a small handful of stocks are holding everything up. This combined with our overbought and overextended the market is suggests the momentum for the next market move will be DOWN.
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The yield on the 2-Year U.S. Treasury hit a new high yesterday.
Why does this matter?
Because…
1) It indicates the Fed’s fight to tame inflation is NOT done.
2) Stocks are in for a world of hurt in the coming months.
Regarding #1, back in May 2023, the 2-Year U.S. Treasury was anticipating that the Fed would have rates at 3.75% in May of 2025. At the time, this meant the Fed would cut rates at least two times before May of 2025 (rates were at 5.25% in May 2023).
Fast forward to today, and the 2-Year U.S. Treasury has just broken out to new highs of 5.20%. This means the market is now anticipating that the Fed will have cut rates possibly ONCE by October of 2025. Moreover, the idea that rates will be ABOVE 5% instead of BELOW 4% in late 2025 is a HECK of a shift.
Put simply, the bond market is figuring out that the Fed will need to keep rates MUCH higher for MUCH longer. And this brings us to #2 in our list above.
Stocks are in for a world of hurt.
Stocks are priced based on Treasury yields. This is one of the primary reasons why stocks remain down almost 10% from their all-time highs despite the fact the economy is growing. After all, if you can earn 5.25% risk free in bonds for two years, why risk putting your money into much riskier stocks where both the earnings yield AND the dividend yield are lower (4.07% and 1.62%, respectively).
The great crisis of our lifetimes is fast approaching.
In 2000, the Tech Bubble burst.
In 2007, the Housing Bubble burst.
The long term U.S. Treasury bubble burst in 2022. And the crisis is now approaching.
Smart investors are already taking steps to prepare for this.
If you’ve yet to take steps to prepare for what’s coming, we just published a new exclusive special report How to Invest During This Bear Market.
It details the #1 investment to own during the bear market as well as how to invest to potentially generate life changing wealth when it ends.
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Nearly every market collapse follows a particular pattern.
That pattern?
1) Stocks break down below a critical level of support.
2) Stocks rally to “kiss” this former support, failing to reclaim it.
3) Stocks roll over and the real collapse begins.
This pattern is now playing out with the S&P 500.
The S&P 500 first broke below its 50-day moving average (DMA) in August of 2023. This was a significant development as it was the first time the S&P 500 had lost this support since the March 2023 lows. I’ve illustrated this with a blue rectangle in the chart below.
The market then rallied to retest the 50-DMA from below. It briefly broke above this line in early September, but has failed to hold it.This represents the “kiss” as I mentioned earlier: when stocks try to reclaim critical support but fail to do so. I’ve illustrated this with a purple square in the chart below.
What comes next?
Bonds have been telling us for weeks. It’s just a matter of time before stocks “get it.”
If you’ve yet to take steps to prepare for what’s coming, we just published a new exclusive special report How to Invest During This Bear Market.
It details the #1 investment to own during the bear market as well as how to invest to potentially generate life changing wealth when it ends.
Last week, I noted that the Bureau of Labor Statistics (BLS) and other government agencies have been engaging in a strange scheme.
That scheme?
Releasing economic data that initially suggests the economy is booming, only for that same data to be revised downward multiple times in subsequent months.
Some people think the BLS is massaging the data the make Bidenomics look more successful that it really is. Others simply believe that the BLS is using faulty economic models (after all, how accurate is your model if it needs two or three revisions to be correct?).
Regardless of the reason, this issue continues to happen. And investors keep falling for it!
Case in point, last Friday, the BLS released the non farms payroll numbers for August 2023. And once again, you guessed it, the prior months (June and July) were revised lower. And not by a little: June’s NFP number was revised down by 80,000 jobs, while July’s was revised downward by 30,000 jobs.
Bear in mind, June’s initial NFP number of 209,000 had already been revised downward by 24,000 jobs in July. So with this second downward revision of 80,000 jobs, we now know that HALF of the jobs in the June NFP report were FAKE.
104,000 Fake Jobs / 209,000 Jobs Claimed = 49.7% of the jobs were fake.
As I mentioned a moment ago, the August NFP report also revised July’s job numbers down by 30,000. So when we add this to the 104,000 fake jobs “created” in June, we’re now up to 134,000 FAKE jobs being created in the last two months.
As if that wasn’t bad enough, as Bill King noted in his King Report, seasonal adjustments were boosted to make August’s NFP numbers look better. In 2022, the BLS adjusted August’s NFP numbers upward by 47,000. But for some reason, this very same seasonal adjustment accounted for 117,000 jobs.
Put another way, we already know that 70,000 of the 187,000 jobs the BLS claims the economy generated in August were due to a seasonal adjustment, as opposed to being real jobs created in the economy.
Oh, and bear in mind, July’s numbers have only been revised down once thus far. They will likely be revised down again next month. And we can expect a similar thing to happen for August’s NFP numbers as well.
Indeed, as ZeroHedge recently pointed out, these downward revisions have occurred for every single month in 2023 thus far.
Why does all of this matter?
Because investors are pouring billions of dollars of capital into stocks based on those initial jobs numbers. Check out the below chart and you’ll see what I mean.
These folks are in for a RUDE awakening in the coming weeks. The signs are now clear that the economy is slowing. And this is happening at a time when investors are paying 19 times forward earnings for stocks!
The only time stocks were previously this richly valued was when A) the economy was expanding rapidly and B) the Fed was printing trillions of dollars in new month.
Today the economy is rolling over… and the Fed is DRAINING liquidity from the financial system. So again, investors are buying stocks based on a fantasy.
If you’ve yet to take steps to prepare for what’s coming, we just published a new exclusive special report How to Invest During This Bear Market.
It details the #1 investment to own during the bear market as well as how to invest to potentially generate life changing wealth when it ends.
One of the hallmarks of the Biden Presidency is that economic data is released that looks fantastic at first glance… only to then be revised much lower in subsequent months.
Conspiracy theorists believe this indicates that the Bureau of Labor Statistics (BLS) and other bean-counter agencies are massaging the data to make the economy look better than it is in order to push a narrative that Bidenomics works. Other people simply believe that the reason data is continually being revised lower is because the economic models the BLS and other agencies use are garbage with little value (after all, how great can the model be if it needs to be revised two or three times to get an accurate number).
Regardless of the reason this is happening, the impact is the same: investors are buying stocks based on a fantasy that the economy is booming.
The formula is as follows:
1) The initial data released about jobs or GDP or some other metric looks quite strong.
2) Investors pile into stocks based on the notion that the economy is booming.
3) The data is revised lower, usually more than once.
The key item here is that investors DON’T sell stocks at a later date based on the downward revisions… in fact, few if any investors even bother keeping track of this stuff. And that’s the problem: people are buying based on the illusion of strong economic growth when in reality the growth is much weaker if not indicative of contraction!
As Zerohedge noted a few days ago, the monthly payrolls report has been revised lower every single month in 2023. Again, this is not just one or two months with downward revisions… it’s every. single. month.
Now, you could easily argue that these downward revisions are simply because the BLS’s models are useless, but that’s missing the point: the headline data, or the data that investors use to justify buying stocks at 19 times forward earnings, is WRONG.
In fact, if we dig into less popular data that isn’t broadcast by the financial media, we get a VERY DIFFERENT picture of the U.S. economy.
Take a look at the official job openings data taken from the Federal Reserve. Again, this is official data showing how many jobs are currently available in the U.S. economy. If the economy is booming and businesses are hiring people to expand their operations, why is this number cratering in ways usually associated with a recession.
Meanwhile, investors are bidding stocks higher and higher. As I write this, the stock market is priced at 19 times forward earnings. The only time stocks are this richly valued is when A) the economy is expanding rapidly and B) the Fed is printing trillions of dollars in new month.
Today the economy is rolling over… and the Fed is DRAINING liquidity from the financial system. So again, investors are buying stocks based on a fantasy.
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If longer duration Treasury yields continue to drop, then stocks will find a bottom of sorts. But if Treasury yields continue to rise, particularly on the all-important 10-Year U.S. Treasury, then stocks will be repriced to much lower levels.
As the below chart from Dr Ed Yardeni illustrates, the S&P 500 is currently trading at around 19 times forward earnings. This is an extremely RICH valuation given that the yield on the 10-Year U.S. Treasury is around 4.25%.
Consider that the last time stocks were this richly valued was early 2022 BEFORE the Fed started tightening monetary policy. At that time, the yield on the 10-Year U.S. Treasury was around ~2%. Obviously corporate earnings are now much higher, but the point is that the stock market is priced at a VERY high multiple given where the risk-free rate of return is trading right now.
Something has to give. Either Treasury yields are about to drop hard… or stocks will collapse. And smart investors who are properly positioned for this will see extraordinary returns.
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Ever since the U.S. abandoned the Gold Standard in 1971, U.S. debt, also called Treasuries have become the bedrock of our financial system.
Put in the very simplest of terms, Treasuries are the senior most asset class, with their yields representing the “risk free” rate of return against which all risk assets (stocks, real estate, commodities, etc.) are priced.
Treasury yields are the reason stocks exploded higher from the April 2020 lows. They are also the reason stocks peaked and began a bear market in March 2022. And they are the reason stocks bottomed in October 2022, igniting one of the best bull runs in recent history.
I mention all of this because the yield on the 10-Year U.S. Treasury, which is the single most important bond in the world, has recently hit new highs. And if it doesn’t stop right here and now, stocks are primed for a major collapse.
How major?
The last time the yield on the 10-Year U.S. Treasury was at its current level, the S&P 500 was trading at 3,600. Today it’s at 4,400.
See for yourself.
Sure, stocks might hold up with Treasury yields at these levels for a time. But the clock is ticking. And it’s only a matter of time before we get a NASTY risk off move.
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The S&P 500 has managed to start turning its 200-day moving average (DMA) upwards. This is a significant development is at it indicates that the intermediate to long-term trend is on the verge of becoming “up.”
As positive as this seems, beneath the surface of the markets there are a lot of glaring divergences developing.
Divergences occur when two assets that typically trade in line with each other start to diverge. These kinds of developments tell us that something unusual is happening in the market. Sometimes it’s not a bit deal. Other times, like in late 2007 or just before the shut-downs in 2020, these divergences serve as a warning that a crash or black swan event is about to hit.
On that note, let’s consider some of the more glaring divergences taking place today.
The Retail ETF (XRT) tracks the performance of 90 retailers in the U.S. As such it serves as a decent proxy for the consumer. And XRT has NOT participated in this rally at all. In fact, it’s rapidly approaching its October 2022 lows.
There are other, similar divergences all over the markets.
Tech stocks usually trade in line with inflation-adjusted Treasuries. The reason for this is that Tech is priced based on where “real,” or inflation adjusted, Treasury yields are trading. When yields are relatively low, investors pile into tech because it is a high growth sector.
With that in mind, there is a large divergence between tech stocks and inflation-adjusted Treasuries today. Someone is “wrong” here.
These are just two examples of major divergences, but there are literally over a dozen happening in the stock market right now. Something is very, very “off” about this market rally in stocks.
And I think I know what it is.
What’s happening is that the overall market is being pushed higher by a handful of large tech companies. Because these companies account for nearly 25% of the S&P 500’s overall weight, their outperformance is forcing the overall market to move higher despite all these divergences.
Indeed, when we strip out the effect of these companies with an “equal weight” stock market index, this dynamic becomes clear. MOST of the companies in the S&P 500 are down. Only a small handful are up. They just happen to be the largest companies both in terms of size and in terms of index weighting.
How will this play out?
Sometimes divergences resolve with the trailing assets playing “catch up.” However, when there are so many divergences occurring across so many different areas of the market, this is unlikely.
What’s far more likely is that the markets nose-dive in the near future. Many analysts will tell you “ no one saw this coming!” but now you know better.
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Copper, the commodity
with a PhD in economics, has erased all of its year to date gains. It’s
currently about 10% off its 2022 lows which marked the low for risk assets
before this current bear market rally began.
It’s a similar story
for oil, which is just slightly off its 2023 lows and down 46% from its 2022
highs.
Steel doesn’t look good trading at new lows for 2023.
Ditto for aluminum.
As well as lumber.
Is this demand
destruction? Or is it the result of the Fed tightening monetary policy and
taking out some of the froth from the financial system?
The bond market
suggests its demand destruction. The 2s10s, which has predicted every recession
since 1955 is suggesting a severe recession is coming.
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Thus far in 2023, there have been three major bank failures. And I do mean MAJOR: all told the three banks had $532 billion in assets. That amount is actually greater in size that the combined assets of the 25 banks that failed in 2008.
What is going on here?
What is going on is that the Fed created this mess… and bad risk management at the banks has exacerbated it.
Let me explain.
Traditionally, banks make money as follows:
1) You deposit your money at the bank.
2) The bank pays you a low interest rate on this deposit.
3) The bank turns around and loans out $5, $7, even $10 in loans for every $1 you deposited. The bank charges a much higher rate of interest on these loans than the interest rate it pays you on your deposit.
4) Alternatively, the bank buys $5, $7, or even $10 in long-duration assets (Treasuries, or other long-term bonds) for every $1 you deposited.
5) The bank pockets the spread between the interest it earns on its loans/ bonds and the interest rate is pays you on your deposits.
This situation works well provided the Fed keeps interest rates low. Unfortunately for the banks, the Fed unleashed inflation by printing ~$5 TRILLION between 2020 and 2022.
Bond yields trade based on many things… including inflation. And once inflation entered the financial system, Treasury yields ripped higher.
When Treasury yields rise, bond prices FALL. And who was sitting on trillions of dollars’ worth of long-term Treasuries and loans that traded based on long-term Treasuries?
You guessed it… the regional banks.
Courtesy of the Fed’s idiocy, the banks were destined to be sitting on hundreds of billions of dollars worth of losses on these assets.
But it gets worse.
Once the Fed finally decided to get off its rear and do something about inflation, it embarked on its most aggressive rate hike cycle in history, raising rates from 0.25% to 5% in the span of a single year.
Why does this matter?
Remember how banks pay you a low interest rate on your deposit? Well who is going to want to keep his or her money in a bank that pays 0.3% at best… when he or she can earn 4% or even 5% in a money market fund or short-term Treasury bond, courtesy of the Fed raising rates so high so fast ?
And so, depositors began pulling their money from banks… and not by a little: 2022 was the first year since 1945 in which money on a NET BASIS left the banking system in the U.S.
But hang on… remember how the bank loaned out or bought $5, $7, or even $10 worth of loans or long-term assets based on every $1 you deposited in the bank? Well when you pull your money out of the bank, the bank has to unload all that stuff to maintain its capital requirements.
And so, the Fed delivered the ultimate 1-2 punch to the U.S. regional banking system.
The first punch was it ignored inflation to the point that the banks were sitting on hundreds of billions of dollars’ worth of losses.
However, the KO punch was the Fed raised rates aggressively, which resulted in depositors pulling money out of the banks in search of higher returns on their cash.
Now, don’t get me wrong. The banks are partially to blame for the fact that didn’t act once the Fed announced it would be raising rates to end inflation. With proper risk management (bond hedges for instance) these banks would have been better prepared for the bond market massacre of 2022.
However, even careful risk management would have done nothing to help these banks once depositors started pulling their money out. And no bank could raise its deposit rates to 4% or 5% to compete with money market funds or short-term Treasuries while staying in business.
And so we get this: a situation in which MAJOR regional banks are going bust and the regional bank ETF has lost a third of its value in the span of six weeks.
This situation is nowhere near over. According to some analysis, HALF of the U.S.’s banks are currently insolvent.
The clock is ticking here. Ignore trader games, something BAD is coming to the markets.
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