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Want The Good News Or The Bad?
The bad news is the S&P 500 just had its worst first half start in 52 years — down 21%.
The Nasdaq 100 had its worst first half start in 20 years — down 30%.
The bond market is having its worst year since the Civil War in 1865.
The bad news is the war over the market is lost. All the Generals have been shot.
The bad news is that things can get even worse.
The Fed is on a warpath to bring down inflation. And doesn’t care how much wealth they destroy to bring inflation back to its 2% mandate.
Here’s what we said June 21st in The Fed Isn’t Going To Stop:
“The asset carnage isn’t likely to be over.
And the Federal Reserve doesn’t care how much more wealth of yours they have to destroy in order to get inflation back to their 2% mandate…
The Fed is hellbent on tackling inflation.
And are willing to destroy people’s wealth until they see inflation abate.
That means lower stock prices. Lower bond prices. Lower crypto prices. A housing cooldown. Alternative asset cooldowns.
(Mike and I aren’t predicting where the markets will go either — rather the probabilities continue to skew to the downside.)
The Fed has already destroyed $10+ trillion in wealth. But this is the first time they’ve publicly admitted to not caring about wealth destruction. Which is a complete 180 from the previous 22 years where they’ve saved people’s wealth — hence the term ‘The Fed Put.’”
Here’s what Federal Reserve Chairman, Jerome Powell, said a week after our post.
“I think we now understand better how little we understand about inflation.”
Read that again, if your jaw didn’t drop.
This is coming from the central bank filled with PHD economists who control our country’s monetary policy.
They’ve been calling inflation transitory for over a year. And have been pumping trillions of dollars into the system up until a few months ago.
It is only now they admit they had no idea what the consequences are/were.
Which means they’ll do whatever it takes to wipe the egg off their face.
Including putting us into recession — if we’re not already in one.
Recessions are a natural part of the economic cycle. But it means pain. Pain in the form of job losses and lower earnings.
The scary part, in terms of the market, is that Wall Street still expects companies within the S&P 500 to increase their earnings after everything we’ve been through in the first half of this year.
We know Wall Street is incentivized to be perma-bullish. But there’s hardly a way to see through the carnage this year and still wear rose-colored glasses.
The entire tech sector is laying off people en masse. Walmart & Target had inventory buildups that sent their shares down the most in a single day since Black Monday in 1987. Nvidia & Advanced Micro Devices (AMD) are seeing semiconductor inventory levels rise. The Crypto industry — where tens of thousands of people are employed and have made significant wealth — is imploding.
We’re not sure where Wall Street is getting their information. But the base case should be an earnings decline… not an earnings increase.
This proves the carnage we’ve seen thus far has been multiple compression, not earnings compression. (Stocks generally go up two ways: 1) the multiple someone is willing to pay on a company’s earnings, i.e. the “P” in the P/E ratio; or 2) the earnings of that company go up: the “E.” Wall Street thinks the “E” is still going up and it’s just the “P” that’s come down.)
The average stock market decline in recessions is more than 30%. Meaning the S&P 500 could drop another 12% from here… but that’s just the average.
We hate to be this ominous. But that’s the bad news.
So what could possibly be the good news?
The good news is bull markets are born out of recessions.
Recessions are the economic equivalent of a forest fire killing off all the dead trees… and making way for new, stronger ones. It’s the equivalent of nature healing itself.
Every asset class has been distorted by free money and 0% interest rates. There was a bubble in everything. Stocks, bonds, crypto, real estate, new and used cars, collectibles, etc…
The asset carnage is finally our way of buying stuff on the cheap. Something we’ve all wanted for the longest time. But haven’t gotten the chance.
The good news is buying stocks at these levels historically have more times than not yielded incredible returns through the 2nd half of the year.
Or shown another way.
The good news is when celebrities get involved in economics or trendy financial investments, it’s usually a contrarian signal.
Think when model Gisele Bündchen — who is also married to Tom Brady — who asked to be paid in euros over U.S. dollars in 2007. The U.S. dollar bull market started right after.
Think Elon Musk promoting Dogecoin on SNL early 2021. Dogecoin is down over 90% since.
Think Serena Williams or singer Ciara sponsoring SPACs in early 2021 too. Williams’ SPAC is down 90%. Ciara’s SPAC hasn’t found a company to merge with yet. And is coming up on their expiration date before having to return the funds to shareholders.
We just got another potential signal. Here’s what rapper Cardi B last month:
When y’all think they going to announce that we going into a recession?
— Cardi B (@iamcardib)
4:17 PM • Jun 5, 2022
Cardi B is worth $40 million.
You know inflation is running rampant — and the economy is hurting — when it impacts the super wealthy.
But the good news is… the markets are forward looking. We could be closer to the bottom with all of this information priced in. History shows positive returns from here. So dollar cost averaging could be a good way to yield high returns.
Mike and I have still positioned Mighty clients very defensively. We’re still 30%+ cash. With a few hedges in place.
The probabilities continue to skew to the downside. And the knife is still falling. So we are waiting until it hits the ground before going back all-in.
But history shows no one can time the markets. It’s best to stay invested. And investing at these levels end up yielding good results even with more volatility ahead.
So we continue to deploy capital very selectively and defensively. Because volatility is here to stay. We hope you do the same.
Good investing,
Lance