More and more it looks like recession is here. This includes a dramatic decline for ISM Manufacturing discovered this morning. As you likely know, most economist call manufacturing the “canary in the coal mine” for the US economy as it often shows weakness before other areas. In fact, GDP Now from the Atlanta Fed reads it loud and clear with a negative revision for the US economy down to -2.1% for Q2. Ouch! We are going to discuss these new economic facts…what it means for the stock market outlook…and an interesting view on why the S&P 500 (SPY) does not decline in orderly fashion. All that and more is coming your way in this week’s commentary….
Please enjoy this updated version of my weekly commentary.
Recessions and bear markets go together like peanut butter and jelly. And that is why we investors need to be on proactive lookout for a recession at this time to confirm why the bear is in place and likely to maul stocks further.
Unfortunately the clues on Friday nearly guarantee that recession is here for which investors should “watch out below” for more downside activity.
As stated in the intro, ISM Manufacturing was a grave disappointment today coming in well under expectations at 53.0. Worst of all the forward looking New Orders component rolled over into negative territory at 49.2.
All this bad news was factored into today’s -2.1% reading from the Atlanta Fed’s GDP Now estimate for Q2. That is a noteworthy decline from just -1.0% yesterday. Let’s not forget that back in mid-May this model was pointing to +2.5 growth.
This clearly states that report by report the economy has been heading in the wrong direction for a while.
Now consider that the definition of recession is 2 straight quarters of negative GDP. Thus, with Q1 being an anemic -1.6% means that investors were right to head for the hills early in the year.
So now we have a pretty much confirmed recession to go hand in hand with a confirmed bear market since 6/13 when we crossed below the 20% decline line @ 3,855.
I suspect bottom will be found somewhere between -30% (3,372) to -40% (2,891) given that the average bear market leads to 34% decline. Which means we have not seen the lows quite yet.
Now let’s transition to another interesting conversation brought up to be my many customers. If it is so obvious that we are in a recession and bear market…then why does the S&P 500 (SPY) not descend in a more orderly fashion?
For example, today with even more recessionary evidence in hand the market actually ended higher. That just doesn’t make any darn sense on the surface. But as we dig down a bit more we will appreciate the circuitous path stocks take to their final destination.
First and foremost we know that nothing with the market (SPY) is smooth. Ever since the rise of computer based trading it has greatly amplified volatility with many more sessions in the plus or minus 1% camp.
However, the real issue is that there are so many different types of investors with so many different styles and view points that smooth alignment of purpose is never in the cards. For example, consider all these varying investment aspects:
Long term buy and hold investors vs. swing traders with 1-3 month time horizon vs. day traders dealing in seconds and minutes.
Aggressive vs. conservative investors
Growth vs. value vs. income vs. momentum investors
Computer driven quant models vs. human decision making
Fundamental investors vs. technical investors.
Even just in the realm of fundamental investors, you appreciate that economics is an inexact science. So if got 10 economists in the room you are likely to have 10 different opinions.
Heck, over the decades on average only 40% of economist predict a recession before it arrives. This is why economists are often the butt of stock market jokes.
And the list of differing points of view goes on. And this is why the S&P 500 (SPY) rarely goes up or down in smooth fashion.
Back to the main point. This is a recession. And thus a bear market. Stocks going down in coming weeks and months is the most likely outcome.
HOW, WHEN & WHERE we find bottom is the great mystery. But as long as you appreciate the big picture on these things you can align yourself to the prevailing trends and find a way to outperform.
What To Do Next?
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SPY shares closed at $381.24 on Friday, up $3.99 (+1.06%). Year-to-date, SPY has declined -19.14%, 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.