The confusing condition of today’s market … will it be a regular bear or a recessionary bear? … what history tells us about how that answer impacts returns Before we jump in, a quick note that our offices will be closed on Monday in honor of Independence Day. If you need help from our Customer Service team, they’ll be happy to assist you when our offices reopen on Tuesday. Have a great Fourth! ***Whether you believe we’re in for a recession or you believe we’ll skirt one, there are economic data to support your opinion Unfortunately, that makes today’s market challenging for traders. After all, if Wall Street knew for sure that a recession was coming and earnings were going to tank, the appropriate action would be pretty simple – certain assets would be a “buy” while others would be a “sell.” It’s the same if Wall Street knew we’d skirt the recession, leading to earnings growth a few months later – Wall Street would buy one part of the market and sell another. The worst thing is the unknown, which prevents traders from taking an establishing position either way. Unfortunately, “unknown” is where we find ourselves today. ADVERTISEMENT Inflation-Proof? Instant Cash Payouts in ANY Market THIS Is the #1 Way to Beat Inflation. If you’re worried about inflation…And the up-and-down markets, you’re not alone. But… if you’re willing to learn something new…You can generate steady, instant cash payouts of as much as $700… $1,375… or even $2,290… No matter what the market does next. Get the free details here. ***Let’s look at one illustrative headscratcher with the help of our technical experts John Jagerson and Wade Hansen For newer Digest readers, John and Wade are the analysts behind Strategic Trader. This premier trading service combines options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways. From their Wednesday update: GDP for the first quarter of 2022 was down -1.5%, which was largely due to lower inventory investment, reduced government spending, and rising imports. This contrasts with corporate earnings that still showed growth. Even if we exclude the soaring energy sector, earnings were higher in the first quarter than the same period last year. This is an odd divergence. For example, when GDP on an annualized basis was negative in 2011 and 2014, S&P 500 earnings were also in decline. This is one of a few reasons why there is so much debate among traders about whether this is a ‘recession market’ or just a bear market. Let’s add to the confusion. John and Wade point out that the average analyst expectation for earnings and GDP in the second quarter are still positive, coming in at 10.7% and 1.9%, respectively. Seriously? On the earnings front, there are signs of economic slowdowns everywhere. All week long in the Digest, we’ve been featuring data showing decreased economic activity, reduced consumer spending, reduced consumer savings, reduced manufacturing output, the “Bullwhip Effect” that will be a drag on retail earnings… Yet, despite all this, analysts are calling for Q2 earnings to be up 10.7%? And as to Q2 GDP, are these analysts not looking at the Federal Reserve Bank of Atlanta’s GDPNow tool, which estimates Q2 growth will be – wait for it – negative 1.0%? Here’s the breakdown from GDPNow (which comes from the Federal Reserve Bank of Atlanta): …The nowcasts of second-quarter real personal consumption expenditures growth and real gross private domestic investment growth decreased from 2.7 percent and -8.1 percent, respectively, to 1.7 percent and -13.2 percent, respectively, while the nowcast of the contribution of the change in real net exports to second-quarter GDP growth increased from -0.11 percentage points to 0.35 percentage points. If this Q2 negative GDP materializes, that’s an official recession, since Q1 GDP was negative. So, what’s happening here? Why are some estimates so bullish in the face of so much bearishness? Well, we’re seeing a tug of war between analysts who are expecting a regular, non-recessionary bear market versus those who believe we’ll suffer a more damaging recessionary bear market. ADVERTISEMENT Apple May Help Investors Strike It Rich Once Again Apple is preparing to unveil its next potential trillion-dollar product, and according to the analyst who was ranked as America’s #1 stock picker back in 2020 by TipRanks… it could give early investors a shot at 40X gains if they know where to look! Click the button for more details. ***A tale of two bears The difference between a non-recessionary bear market and a recessionary bear market can be huge. Back to John and Wade with the numbers and what they mean for the S&P today: Compared to the average bear markets that have occurred during a recession over the last 50 years, the S&P 500 still looks a little overvalued by about 10%. However, when compared to bear markets that have occurred without a true recession (at least two sequential quarters of negative GDP growth) then the S&P 500 is undervalued by about 9%. If second-quarter earnings and/or GDP surprise with better-than-expected numbers, we should see prices jump back up to the 4,200-4,250 range. Disappointments in those two areas could send the major indexes to a new low. From this perspective, it makes sense why Wall Street is experiencing analysis paralysis – bet on the wrong outcome, and you’re likely to get dinged, whether from a 10% loss or a 9% opportunity cost. So, which side are you betting on? Here’s John and Wade’s expectation: Based on the information we have available to us right now, we lean in favor of undervalued rather than overvalued right now, and our confidence level will be much higher once earnings start to stream in after Independence Day next week. John and Wade aren’t the only analysts who feel this way. From JPMorgan, yesterday: If there is no recession — which is our view — then risky asset prices are too cheap. For instance, small cap stocks in the U.S. currently trade near the lowest valuations ever. Many equity market segments are down 60-80%. Positioning and sentiment of investors is at multi-decade lows… So, it is not that we think that the world and economies are in great shape, but just that an average investor expects an economic disaster, and if that does not materialize, risky asset classes could recover most of their losses from the first half. Clearly, the upcoming Q2 earnings season is going to be critically important for which direction the market heads for the rest of 2022. ADVERTISEMENT The $7 Retirement Secret—Revealed Here Retired or about to retire? Need A LOT more income? No problem…Former fund manager shows you how one simple transaction can get you instant cash payouts of as much as $1,290… $1,525… and $1,795 IN A SINGLE DAY. If you’re “behind” on retirement, this could be perfect for you. Free details here. ***In the meantime, here’s what John and Wade are watching - Bad earnings from the banks, even though it’s already priced in.
Here’s more, from the Strategic Trader update: Higher interest rates are supposed to help the banks (which they usually do), but the decline in mortgage borrowing is dragging on the sector. This is the most likely place for a positive surprise because expectations are so low. Bank earnings will start in about two weeks and could be a catalyst that helps push prices higher – or at least strengthens support. - The extent to which retail and consumer cyclical stocks get discounted.
From John and Wade: We all know that inventory problems, inflationary pressure, and rising interest rates are cutting into consumer spending, but these stocks are not at fair valuations compared to prior bear markets. We will be watching the sector closely for more reports like Nike Inc. (NKE)’s on Monday, where sales growth was positive and above expectations, despite issues in China and inflation in the U.S. - More pain for the energy trade?
Back to the update: Lower energy prices mean less inflation. Right now, oil prices are above support at $100 bbl. If production increases and demand expectations ease back, it could motivate buyers in the tech and industrial sector that have been hanging back for fear of the Fed’s rate-hike schedule. ***Don’t expect too many fireworks from the markets between now and earnings season The first big round of earnings doesn’t begin until JPMorgan reports on July 14th. John and Wade don’t expect any major market moves between now and then. Instead, traders will place their bets on what earnings reveal about the type of bear market we’re likely to have. As you can see from John and Wade’s analysis, there’s lots on the line. Have a good evening, Jeff Remsburg | 
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