(Please enjoy this updated version of my weekly commentary published May 2nd, 2022 from the POWR Value newsletter).
The best starting point for this conversation is what I shared in my Thursday 4/28/22 note to Reitmeister Total Return members. Here is the key excerpt:
“Tuesday’s commentary got us ready for a wide range of outcomes following the Q1 GDP report. Right now it looks like the 3rd option is what happened. Let me repeat that section here:
“The one wrinkle to the bear case is that any weakness found in the economy could actually be a positive for stocks.
SAY WHAT?
That’s because bad news for the economy is good news for changing the Feds tune on raising rates…which investors could actually applaud with a rally.”
So yes, the -1.4% reading for GDP is shockingly bad on the surface. But in some ways its so bad its comical…as in not believable.
In my quick reading of the internals of the report there are many 1 time events that were oddities in the quarter (like lower than usual exports while imports surged…or lower government spending) that cause a temporary drop…but not a worrisome concern for what happens next.
The best quote I have seen from another market expert is that this report is “Noise, NOT Signal”.
Meaning this is not really a recessionary signal. This helps explain why the S&P is up nearly 1% as I write this commentary. Even rates are up.
Because if truly this was about increasing the odds of recession and bear market, then the exact opposite would be happening in both cases. In fact, if people thought this -1.4% had any merit the S&P would be testing 4,000 at this very moment.
Long story short, we are going to do nothing today with our continued vigilant watch for forthcoming information that gets us more bullish or bearish.”
(end of 4/28/22 Reitmeister Total Return commentary).
Let’s pick up the conversation from there by saying that stocks quickly rejected that Thursday bounce by plummeting a scary 5% from there into the Monday lows.
It's hard to say exactly why there was a change of heart when the vast majority of experts I follow believe the weak print of Q1 GDP is downright laughable.
Or to put it this way…if this report was a sign of more economic damage to come, then there is no way that the GDPNow Q2 forecast from the Atlanta Fed would be as high as +1.6%.
Nor would the Blue Chip Consensus panel of economists see growth almost twice that level at +2.8% for the current quarter.
The point being that there is not much reason to call for a recession and bear market at this time. But indeed it is fair to talk about stagflation.
Most of you have probably read a bit about stagflation lately as it is a popular topic bringing us back to an early 1970’s mindset with high inflation (mostly brought on by soaring energy prices) + stagnant GDP Growth = stocks going nowhere.
The big difference between now and then is that the 10 year Treasury stormed from 7% at the beginning of the decade to a notch below 16% to start the 1980’s.
In that world you HAVE to like the value in bonds versus stocks (which explains the 40 year bull market in bonds that ensued).
Right now the 10 Year Treasury made big news by rising to 3%. Yes, that is nearly twice the level as the start of the year…but it is WELL under the historical average rate of 4%...and EONS lower than that stagflationary period of the 70’s and 80’s.
The point is that stocks are still the better value at this time than bonds. So as long as we avoid a recession, then we will also avoid a bear market.
This means that stocks are likely in a bottoming process. One could say that 4,000 could very well be that level given the tremendous support that is found at all century marks on the index.
If we broke below 4,000 then it could be a move down towards the border of bear market territory at 3,855. That is precisely 20% below the all time high of 4,818.62.
To head under that mark would be a sign of conviction on the part of investors that indeed recession is coming and bear market is the natural outcome. Yet, I do not believe that conviction is there.
First because the economy is not truly in a recession (as noted above). Second, because there is no other attractive place to invest in right now.
That’s because putting your money in cash or bonds is a guaranteed a loss versus high inflation right now. So that will turn more heads towards the stock market coming off yet another strong earnings season with corporate profits projected higher for the future.
This is an oft overlooked economic indicator. Because corporate managers need to keep earnings guidance low making it all the easier to leap over when they report next.
So the very fact that guidance was indeed strong after Q1 earnings means that these highly qualified people, with their feet firmly on the ground of the economy do not see the signs of slowing.
To me that says odds of recession is very low and that soon investors will “buy the dip” and “climb the wall of worry” to close the chapter on this correction once and for all.
Or to put it another way…I expect us to have a scary drop towards to a new capitulation low between 3,855 and 4,000. And at that darkest hour stocks should bounce with gusto making it prudent to stay bullish at this time.
Portfolio Update
Our portfolio outperformed the S&P for 14 out of the last 16 sessions. And as we pull back to the year to date picture we find a modest -0.91% loss for POWR Value versus -12.82% for the S&P 500.
That means we have weathered the storm so much better than most.
If I am right that the market is in a bottoming process, then it means it will get much rougher before it gets easier. Just hold tightly to the bullish reigns no matter how much we get tossed around.
Because until there is more ominous signs on the economic front, then the risk is to the upside…not downside. And thus to sell at this time would prove to be ill advised.
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SPY shares . Year-to-date, SPY has declined -12.46%, versus a % rise in the benchmark S&P 500 index during the same period.
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.
Why Today’s Market Differs from the Stagflationary Stock Market Seen in the 70s StockNews.com
