One of the most confusing things for investors to wrap their heads around is the correlation between the current economic picture versus the movement of stock prices.

If the economy looks good and the market goes down it seems counterintuitive. Same goes for the darkest hour of a bear market as stocks start to rise as the economy is still in horrendous shape.

Now is one of those times when investors are a bit befuddled by the contradiction between the seemingly healthy economy versus the red arrows abounding in stock prices. So, let’s tackle this timely topic in today’s commentary.

Market Commentary

After the first close under 4,000 on Tuesday there truly has been a “battle for the soul” of this stock market. At first on Wednesday bulls were in charge rushing back over 4,000. Then tick by tick the bears clawed their way back. In the end the S&P 500 (SPY) fell once again Wednesday to close at 3,955.

Yes, there was a little bounce Thursday for the S&P…but “Risk On” positions were pummeled as can be seen by the -1.15% showing for the small caps in the Russell 2000. Thus, notch another session for the bears with yet it was a third straight close under 4,000.

And then on Friday larger early gains were washed off the board to close down over 1% at 3,924 marking the fourth straight week of losses. Most technical analysts would call that a confirmation of the break under 4,000 as it turns from support into resistance.

All this recent negativity seems quite odd as there are some clear positives to point to in the economy. Like 315,000 jobs added in August keeping up the healthy employment trends. We could talk about many other individual economic reports showing growth, but its best to center on the GDP picture for the US as that takes everything into account.

The recently updated GDP Now estimate from the Atlanta Fed for Q3 just got bumped up to +2.6% after a solid showing for ISM Manufacturing. This starkly contrasts with the pain levied on stocks that same day as they sunk further under 4,000.

This takes us back to the theme noted in the intro: How can we explain recent stock weakness in light of solid economic readings?

The simple answer is that investors are always looking ahead. Like what is likely coming around the corner so they can make adjustments before it’s too late.

Remember that the majority of the money in the market is invested by professionals. Not individuals.

Whereas you and I can go from 100% long to 100% short in just a few minutes in our online brokerage accounts. The same is not true for professionals who often have to manage billions of dollars. Some having such large positions concentrated in just a small collection of stocks that if they sold them too fast their actions alone would crater the shares.

This explains why they need to look ahead. So, they can strategize how to make major shifts in their portfolios that could take weeks or months to complete.

So, What Are the Pros Forecasting Now?

Inflation is still too high and not fading any time soon. Add to that a VERY hawkish Fed that is pounding the table that they will keep raising rates through 2023 and it will cause economic PAIN.

Those who didn’t understand this basic equation were told so from the mountain tops of Jackson Hole last week for which stock prices have tumbled ever since. Meaning investors have received the memo.

Note everyone had this memo in hand back in May/June, but somehow lost it during the outsized and nonsensical July/August rally. Now it is taped to their monitors once again.

The message is also being received on Wall Street as Q1 2023 earnings estimates have been trimmed down to showing only 3% earnings growth. Even worse Q2 of next year is basically at no growth. This is a far cry from the 10-15% earnings growth we were enjoying in recent quarters.

Also take a gander at plummeting commodity prices this past week. Namely oil going from a recent high of $95 per barrel to $88 in just a weeks time.

That is NOT about current supply and demand dynamics. This is absolutely about speculators looking ahead to the future economic conditions and taking their money out of these trades because looming recession does = lower future demand which does = lower prices ahead.

This same song is being sung in corporate executive suites as well. According to recent surveys by The Conference Board 77% of CEO’s believe that recent economic conditions have worsened over Q2. That is up from 61% who felt that way when surveyed in Q2. Even more gloomy, only 7% predict sustained growth in 2023.

If executives are predicting recession…then it likely will become a self-fulfilling prophecy. That’s because their negativity leads to caution in how they manage their business, which leads to lower tolerance for spending or investing in the business. The more companies that move forward with that caution by its very definition equates to lower economic activity and increased odds of recession.

OK…the Outlook Has Worsened…So What is the Trading Plan NOW?

I have been on the bear market bandwagon since late May. That looked brilliant at first as stocks finally took the dive into bear market territory by mid June. But then there was a 2 month detour via an 18% bounce that bordered on criminally insane.

Since then, rationality has been restored to stock prices by heading lower once again given the ominous economic outlook. In my last commentary I talked about a fork in the road that looked like 50% odd of stocks staying range bound above 4,000. And 50% odds of descending back into bear market territory.

In the few days that have followed the latter argument is winning with stocks clawing lower and lower. At this stage the next logical support level is at the old battle ground of 3,855 for the S&P (SPY). That is the line that demarks a 20% decline from the January highs which we all appreciate that below that level is bear market territory.

That 3,855 level would be a good point for investors to pause and reflect on what comes next. Most likely with pessimism so high amongst consumers and businesses alike, we will in time keep rolling towards recession and commensurate bear market will unfold.

Just a reminder that the average bear market equates to a 34% decline from the highs. That points to 3,180 which is well below current levels.

Of course with any average there is a wide range of potential outcomes. This could be a milder bear…or a bit more ferocious. But I do sense that somewhere in the 3,000 to 3,200 area we will find bottom.

If true, then it means to prepare your portfolio for more stock price declines.

What To Do Next?

Discover my hedged portfolio of exactly 10 positions to help generate gains as the market descends back into a bear market territory.

And yes, once again it ended up firmly in the plus column this Friday even as the S&P crumbled.

This is not my first time employing this strategy. In fact, I did the same thing at the onset of the Coronavirus in March 2020 to generate a +5.13% return the same week the market collapsed -15%.

If you are fully convinced this is a bull market…then please feel free to ignore.

However, if the bearish argument shared above does make you curious as to what happens next…then do consider getting my “Bear Market Game Plan” that includes specifics on the 10 positions in my hedged portfolio.

Click Here to Learn More >

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 rose $0.71 (+0.18%) in after-hours trading Friday. Year-to-date, SPY has declined -16.80%, 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. More...

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