Bear markets can be brutal and messy. They often don’t end until testing the resolve of investors. And even for bears, they aren’t easy affairs as evidenced by the stock market’s 7% pop following a soft CPI report. They also are necessary and healthy as they cleanse the financial system and economy of fraud and bad actors as we are seeing with the FTX blowup. In terms of the economy, certain parts of the economy are under pressure, but there’s nothing rotten systemically or signs of excess leverage which would cause a cascade lower like 2008. In today’s commentary, I want to talk about the inflation report and put it in context within today’s stock market (SPY). Then, I want to touch on the various blowups that we’ve seen during the bear market and my gameplan for taking advantage of the opportunities created amid the wreckage. Read on below to find out more….
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(Please enjoy this updated version of my weekly commentary published November 15th, 2022 from the POWR Growth newsletter).
As usual, we will start by reviewing the past week…
Here is an hourly, 3-week chart of the S&P 500 (SPY):
Over the last week, the S&P 500 is up by just under 7% with the major catalyst being a softer-than-expected CPI report.
Inflation Report
[This section is from the POWR Stocks Under $10 commentary but modified to make it more appropriate for growth stocks.]
It should be obvious to anyone why falling inflation is a big deal and bullish for asset prices as it basically would mean that a massive market headwind turns into a tailwind.
Falling inflation, on its own, would bring relief to consumers and lead to margin expansion for companies. In addition, it would result in rates turning lower which would also boost the housing market and reduce borrowing costs for corporations.
Not to mention that falling rates would automatically boost growth stocks… even if the economic outlook deteriorates.
In essence, it would reverse a lot of the market pain.
And that was evident in Thursday’s action which saw leadership from both homebuilding stocks and speculative tech stocks as both groups have been hammered by rising rates even though these sectors have little connection to each other on a fundamental basis.
Thus, it makes sense that if rates are going to reverse and turn lower, these are the groups that will outperform on the upside.
In hindsight, it’s quite possible that inflation peaked this summer and is now plateauing or rolling over. And, it’s possible that the stock market successfully sniffed this out as it bottomed along with the high reading in the CPI.
Then, these lows were re-tested and undercut in October with a lower high for the CPI but a higher high for core CPI, before once again recovering higher the last couple of weeks.
Going into the CPI report, I was of mixed opinion about the number but leaning bearish on the market due to a hawkish Fed and a slowing economy. The inflation reading neuters the former factor at least for the short term.
This is evident with the big decline in yields, and it would take higher highs in inflation to get new highs in yields.
In fact, it’s possible that we have seen the cycle high in yields, especially if the economy starts to seriously slow.
This means the bearish case rests on seeing a contraction in earnings which causes another leg lower in stock prices.
And on a longer-term basis, the path that inflation takes will now be the major focus of Fed policy and be the main factor in determining whether we are in the end stages or middle stages of the bear market.
Bear Market Blowups + Gameplan
The bear market for the overall market (SPY) began in January 2022 but the bear market for tech and specifically high-multiple, speculative, and crypto began in early 2021.
Over the course of many months, we have seen all the leveraged players in the crypto space blow up, while many prominent startups have been unable to get funding or have seen their valuations dramatically diminish.
In terms of public markets, there are so many carcasses like Carvana, ARK, Peloton, Teladoc, Zoom, etc. Many of these companies continue to lose money and have no viable path to profitability or positive cash flow.
They simply had the fortune to raise money at inflated valuations which is giving them a long runway.
This happens in every bear market as we see fraud and rot taken out of the system, setting the stage for the next bull market. The negative price action leads to bearish sentiment and very favorable valuations.
For example, after the 2008 Great Recession, there was a great chance to buy innovative and game-changing stocks like Apple, Amazon, Netflix, Green Mountain Coffee, etc., at attractive valuations.
My ultimate gameplan is to take advantage of these opportunities and maximize our capital to be aggressive when the time is right. Of course, we’ve accomplished the first step of the plan by avoiding these blowups in the first place which have destroyed so many portfolios.
What To Do Next?
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All the Best!
Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Growth Newsletter
SPY shares . Year-to-date, SPY has declined -15.13%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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