Some price action for the S&P 500 (SPY) is quite meaningful and tells you a great deal about the future direction of stocks. And some price action is just useless noise. Such is the case for trading during the holidays when so many people are on vacation and trading volume is light. So what can help guide our way for the weeks and months ahead? Reviewing the 5 reasons to still be bearish in early 2023. That will be the focus of this week’s Reitmeister Total Return commentary shared below.
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Market Commentary
Earlier in December I put together this vital presentation: 2023 Stock Market Outlook
The ideas shared there are just as valuable today. So, if you haven’t watched it already, then click the link above to get started and then proceed with the material below.
Today I want to provide an updated version of the all-important opening section where I review the 5 key reasons to still be bearish in 2023. That starts by appreciating that the recessionary storm clouds are darkening over the first half of 2023. And if a recession is in the air, it creates this very negative vicious cycle:
Recession > Job Loss > Lower Income > Lower Spending > Lower Corporate Profits > Lower Share Prices > Rinse & Repeat
The “Rinse & Repeat” part explains why this can be such a vicious cycle. Because the most oft used cure for lower corporate profits is to lower expenses. And that typically means deeper job loss which revs up the cycle again leading to a weaker and weaker economy (and lower and lower stock prices).
Let’s also remember that the Fed only has tools that influence the economy over time, but are far from perfect instruments. Like the fact that they have been raising rates aggressively since March and only recently have we seen any noticeable reduction to high inflation. Yet still too high which is why the job is far from over.
The same thing will be true about the delayed effects when the Fed wants to revive the economy down the road. It is far from an “On” switch that immediately kicks the economy back into high gear.
Think of a recession the same as opening “Pandoras Box“. Once these demons have been unleashed it will harder than you think for the Fed to contain. Which explains why the lookout for recession is the key ingredient in making a bull/bear stock market prediction and trading plan.
With that backdrop firmly in place, let’s now review the 5 key reasons that point to recession and bear market forming in early 2023:
Bear Reason #1: Inflation > Recession
Look at this chart showing how high inflation correlates with recession (gray bar) and bear markets:
Yes, we are well above most of the previous inflationary peaks that have led to recession. So pretty easy to appreciate how the current inflationary soil is ripe for growing a recession in the near future.
Bear Reason #2: Inverted Yield Curve
Once again, a picture is worth a thousand words.
This consistency of this predictive indicator explains why so many market commentators are screaming from the roof tops that a recession is imminent. Remember that the only way to have lower rates for the long term than the short term (aka inverted) is to predict a recession in the future that brings down future rates.
Also please note the severe degree to which we are inverted at this time. We have had many recessions come on the scene with much lower inversion readings…which kind of tells you how high the odds are of recession soon in hand.
Bear Reason #3: Chicago PMI Under 40
8 of the last 8 recessions have been called when the Chicago PMI report comes in under 40. And now feast your eyes on this chart:
Yes, the shocking 37.2 reading this past month was yet another wake up call of how bad economic conditions are becoming. For clarity, please remember that any reading under 50 = contraction. So under 40 is very much a “WATCH OUT BELOW!” signal.
Bear Reason #4: Wall Street Earnings Outlook
Here we discover that Wall Street analysts are already predicting negative earnings for the first 2 quarters of the new year. And you can see how that worsening outlook picked up speed during the last earnings season.
A 6% drop in earnings sounds pretty bad when you realize that +10% growth is the standard. Now let me sound the alarm even more.
The average recession typically brings about a 20% drop in corporate EPS. That level of damage is not currently being factored into stock prices. And thus if a recession is on the way…with much steeper earnings losses…you can appreciate why stocks will likely drop another 15-20% to the final resting place.
Bear Reason #5: Don’t Fight the Fed!
This is every bulls favorite expression when the Fed is lower rates to prop up the economy and stock market. Well now we are seeing the ugly under belly of this concept as they raise rates to bring inflation back to the 2% annual target.
Chairman Powell made it ABUNDANDTLY clear at his 12/14 speech that the dangers of long term high inflation to the economy are much worse than those posed by a recession. This is a fancy way of telling you to not cry when they create a recession because the alternative was so much worse. It also explains why stocks sold off so much so fast after the speech.
Long story short, the Fed is driving the recessionary train by aggressively raising rates to “lower demand” which will MOST LIKELY translate to recession all for the benefit of lowering inflation (the lesser of 2 evils).
Putting it altogether “Don’t Fight the Fed” at this juncture means that they are manufacturing a recession and bear market. And the smart money knows they will make that outlook happen come hell or high water.
Conclusion
Most of the market outlook commentaries you have read in recent months likely cited at least one of these reasons as proof of a recession and bear market on the way. But when you stack all 5 of these accurate predictors on top of each other you get overwhelming odds of what is in store.
This is why I continue to be bearish to start 2023.
And this is why I constructed a portfolio that profits as the market heads lower.
And this is why I recommend you follow the steps highlighted below…
What To Do Next?
Watch my brand new presentation: “2023 Stock Market Outlook” covering:
- Why 2023 is a “Jekyll & Hyde” year for stocks
- 5 Warnings Signs the Bear Returns in Early 2023
- 8 Trades to Profit on the Way Down
- Plan to Bottom Fish @ Market Bottom
- 2 Trades with 100%+ Upside Potential as New Bull Emerges
- And Much More!
Watch Now: “2023 Stock Market Outlook” >
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares . Year-to-date, SPY has declined -18.40%, 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.
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