(Please enjoy this updated version of my weekly commentary published June 3rd, 2022 from the POWR Value newsletter).
In last week’s POWR Value commentary I shared more insights that equated to a higher probability of bear market on the horizon (Read it here).
Since then the preponderance of fresh evidence is also pointing in that negative direction. Meaning the “thought virus” of bear market continues to spread.
Most notable is the updated read of GDP Now from the Atlanta Fed. A couple weeks ago I used this same indicator here as proof of economic strength at +2.5% for Q2.
That has now slid to only +1.3% after the most recent slate of economic results were under expectations. Directionally that is bad news.
Yes some will point to ISM Manufacturing on Wednesday rising from 55.4 to 56.1 as a positive. Or that Government employment today showed 390K job gains which was higher than expected.
However, let’s consider that Manufacturing often turns on a dime and a solid one month tells us little about what happens next. Or the fact that ISM Services today came in lower than expected at 54.5 from 55.9 last month.
Plus the services sector is 4X larger than manufacturing.
As for the seemingly good employment numbers…the sad truth is that employment is a lagging indicator. Meaning it often doesn’t signal trouble to well after a recession has started to take root.
Kind of like a fire alarm that doesn’t go off til after the building has burnt to the ground.
Also of interest, the competing ADP employment report from Thursday was woefully under expectations at only 128K jobs added. That is the slowest pace since the onset of Covid.
Plus historically it has been much more accurate at showing jobs trends than the Government version.
Going beyond economic data is more proof of the bearish thought virus spreading to more places. Here is a slate of the most telling negative headlines proving out that point:
Here’s the email Elon Mush sent to all Tesla employees about a 10% head count reduction
Jamie Dimon (JPMorgan Chase CEO) says “brace yourself” for an economic hurricane
Yes, I could keep going and going. And if you doubt it do Google searches for terms like Bear Market or Job Layoffs and see how much comes up to support this negative notion.
Right now I would say that odds of recession and bear market is north of 50%. That also means that it is not a done deal.
That indeed the Fed could orchestrate a soft landing for the economy as they raise rates and that the recent nasty correction was enough pain before a return to bull market conditions.
Our move down to 69% long in POWR Value is a nod in that direction. That indeed a bear market is not a given and this more conservative stance gives us a better balancing act to get more defensive or aggressive as needed.
Meaning if a bear market is afoot then likely we will sell more of our aggressive positions and rotate to larger, lower beta, conservative positions in the portfolio. Also likely reduce total long exposure to just 50%.
On the other hand, if we avoid bear market territory and get back on a serious and lasting bull run, then we will do the opposite.
That would mean getting back to 100% long in more aggressive positions. That includes a higher dose of small caps, growth stocks and higher beta investments.
Remember that economics is a soft science. Meaning it is not exact making it hard to make concrete predictions.
The same is obviously true for the stock market by extension since recessions and bear markets go hand in hand.
I point this out to help appreciate the step by step approach we are using to get more or less bullish in our portfolio.
That’s because it’s very dangerous to guess wrong and get trampled by the market going the other direction. Better to do more nuanced moves as things unfold.
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About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
Is This the Formation of a Bear Market? StockNews.com
