Last week the market hit correction territory.
That means it had fallen 10% from its all-time high in August.
No doubt, that worried investors.
But are they right to feel that way? And not just about stocks.
What about the claims that a recession is on the cards for 2024?
In yesterday’s Daily Cut, we walked the fine line of highlighting some of the potential market perils… while also pointing out that our experts aren’t yet ready to call for a crash.
So today, we’ll look at the facts.
We’ll see if they confirm our experts’ views that while today’s market has risks, there are still chances to profit from key trends.
Before we get to that, let’s recap today’s market action…
The S&P 500 closed up 0.65% to end the day at 4,193.8… the NASDAQ gained 0.48%, to close at 12,851.24.
For individual stocks, Microsoft closed up 0.24% to $338.11… Apple ended higher by 0.28% at $170.77… and Tesla ended the day at $200.84, a 1.76% rise.
In commodities, West Texas Intermediate crude oil trades at $81.27… gold is $1,993.90 per troy ounce… and bitcoin is $34,561.54.
And now, back to our story…
The Recession That Wasn’t
Some background to today’s thoughts. So stick with us.
Historically, economists define a recession as two consecutive quarters of negative GDP growth. It’s somewhat arbitrary, but you’ve got to have a benchmark.
Remember, GDP is short for gross domestic product. It’s simply a tally of the total value of economic transactions in the economy. It includes both private sector and government spending.
In recent years, we’ve seen big moves in GDP. The decision by governments to shut down the economy in 2020 led to record swings.
GDP fell -4.6% in the first quarter of 2020, and a record -29.9% in the second quarter.
As you would expect, the stock market fell too. The S&P 500 lost 34% of its value in a month.
That was a recession.
But it was short-lived. As people adapted to the “new economy”… and as government stimulus hit people’s bank accounts, we saw a record 35.3% jump in GDP for the third quarter of 2020.
You can see these extremes laid out in the chart below. Compare those two big moves to the smaller changes recorded for most of the past 10 years.
And as you would expect, the market recovered… with the S&P 500 returning an overall gain of 18.4% that year. It actually gained 54% from the March low through to the end of the year!
That was some gain. Aided, of course, by stimulus… and boredom.
And, along with low interest rates, their effects continued through 2021.
But things changed in 2022. GDP fell 1.4% in the first quarter, then another -0.6% the next quarter.
That’s two quarters of negative growth — by definition, a recession.
And yet for some reason, the markets, economists, and the White House decided it wasn’t a recession after all.
Why? Because, they argued, job growth was still strong. The bit they didn’t say was that the mid-term elections were coming up.
No one wants to admit to a pre-election recession on their watch.
But official recession or not, the S&P 500 ended the year down 19.2%. Just 0.8 percentage points short of an official bear market classification – although we’re sure they would have redefined that too, if it came to it!
But that’s the past. What about today and the year ahead?
Well, 54 weeks ago, Bloomberg insisted a recession would happen within the year. Not just insisted… 100% guaranteed it. But, the year is up. The article stated:
“A US recession is effectively certain in the next 12 months in new Bloomberg Economics model projections, a blow to President Joe Biden’s economic messaging ahead of the November midterms.
“The latest recession probability models by Bloomberg economists Anna Wong and Eliza Winger forecast a higher recession probability across all timeframes, with the 12-month estimate of a downturn by October 2023 hitting 100%, up from 65% for the comparable period in the previous update.”
Ah, “probability models.” Staying on the case, Anna Wong, now accompanied by fellow economist Tom Orlik, put pen to paper earlier this month to insist a “US Recession Is Still Likely — and Coming Soon”.
But at least Wong and Orlik acknowledge their own fallibility, by asking and answering:
“Why do economists find it so difficult to anticipate recessions? One reason is simply the way forecasting works. It typically assumes that what happens next in the economy will be some kind of extension of what’s already happened — a linear process, in the jargon. But recessions are non-linear events. The human mind isn’t good at thinking about them.”
It probably helps explain why the perma-bears (those who constantly predict a market crash) have a terrible track record predicting such things.
So is a recession really that imminent…?
Homeowner’s Equity at $3.2 Trillion
As noted last week in The Daily Cut, most tech stocks are crushing it on earnings.
And we’re still in the early stages of using artificial intelligence (AI). That could lead to a multi-year boom in productivity equal to, or better than, the internet.
Meanwhile, inflation is heading down. After peaking at 9.6% last year, last week’s core inflation came in at 3.7%.
While it’s not down at the Federal Reserve’s 2% target, there is a clear trend. Plus, if we believe the Fed’s outlook (we are skeptical), it expects to make one quarter-point rate hike before they leave rates alone… or move them lower.
These are all positive for the economy and the stock market.
But there’s another reason to be positive… and it’s gone unnoticed.
It’s the seeming fact that the economy can absorb higher interest rates. We know that may seem counterintuitive based on what you’ve read elsewhere. But think about it.
While some banks may be under pressure, the Fed has a program that lets them borrow against Treasury bonds held on their books. And those bonds are valued at face value, rather than market value.
This reduces the need for banks to sell bonds that are currently trading well below face value… meaning they don’t have to incur a loss on those bonds. They call it the Bank Term Funding Program.
Not to mention, it has been more than six months since the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank.
Remember, that was a big deal at the time. The markets feared other banks could topple. Many thought it could be 2008 all over again.
It was a reason for thinking the Fed wouldn’t raise rates any further. Yet they have. Not just once, but three times.
And has that caused a bunch of bank failures? No. According to the Federal Deposit Insurance Corporation (FDIC), just one more bank has failed. That was in July, when the Heartland Tri-State Bank, out of Elkhart, Kansas, closed its doors.
Not only that, but the housing market appears to be adjusting to higher rates as well.
Existing homeowners have about $3.2 trillion in equity, according to data from the Federal Reserve. That’s well over the $850 billion they had in 2009.
And with most homeowners on fixed rate mortgages, they’re still enjoying the rates we saw prior to the Fed’s increases. Two years ago, the average 30-year mortgage was below 3%.
Today, the average rate is 7.79%. Both numbers are according to the Federal Home Loan Mortgage Corporation, better known as Freddie Mac.
Now, with higher rates, it’s easy to think that’s making it harder for new buyers to enter the market. But the stocks of homebuilders KB Home (KBH), Lennar Corp. (LEN), and PulteGroup Inc. (PHM) are up 35%, 15%, and 58% respectively, so far this year.
Finally, we can look at stock valuations. The recent market pullback has brought the S&P 500 to 17 times forward earnings. That’s in line with the stock market’s historic average.
According to that metric, stocks aren’t heavily overpriced.
That supports what Legacy Research analyst Phil Anderson says about stocks right now. He has pounded the table on this all year. Phil’s been showing readers that based on where we are in the cycle, now is still a good time to buy…
… And that the market won’t peak until 2025-2026.
Some folks will still say we’re heading for a recession in 2024. They could be right. But it’s also possible the market is in a better place than it seems.
One more thing
In yesterday’s Daily Cut, we mentioned this is a stock-pickers market, not an index-buying market.
One reason is that the indexes are heavily influenced by just a handful of mega-cap stocks. And on any given day, any one of these stocks can move the market up or down.
Good news from Microsoft… the market goes up. Bad news from Apple, the market goes down. Good news from Amazon… the market expected better news… the market goes down.
That’s why we favor the idea of making individual plays on stocks outside of the mega-caps, and largely outside the influence of the mega-caps.
One person we know who is among the best at finding those kind of stocks is friend of Legacy Research, Frank Curzio. We introduced him to our Inner Circle readers last week.
Frank cut his teeth as a research analyst for Jim Cramer of CNBC’s Mad Money fame. Now he runs his own independent financial publishing business, Curzio Research. He also hosts Wall Street Unplugged, the No. 1 most-streamed financial podcast on iTunes.
Frank’s network of industry insiders includes hedge fund managers, stock analysts, blockchain and crypto experts, metaverse and NFT developers, CEOs, economists, world leaders, and more.
His specialty is hunting down asymmetric stock plays that allow investors to place small “bets” in return for big gains. That’s certainly the case with his latest idea.
It’s a company that has developed crime-fighting technology that has the potential for use in every law enforcement department from coast to coast… and in the military, too.
The company in question has dominated the security sector for the past 30 years… but its new life-preserving technology is set to make this stock one of the best speculative ideas over the next two years.
You can check out the precise nature of the tech and the company behind it by watching Frank’s special presentation here.
Our main task at the Daily Cut is to try to “connect the dots” – That is, we help you figure out what events are about, what makes them important, what their consequences are, and what it all means for you.
But sometimes, we see the individual “dots,” but can’t yet figure out how they connect to anything. Maybe they never will.
Regardless, if those unconnected dots feel as though they could be important, we’ll mention them here. And we’ll let you draw your own conclusions.
Today’s unconnected dots…
According to the Financial Times, Nigeria is facing a currency crisis. The Nigerian naira has fallen to 880 to the dollar, from 450 to the dollar six months ago.
Monthly inflation has hit 26.7%, and its oil exports have slowed. Plus, Nigeria is suffering from a shortage of dollars. Seems to us this is another prime opportunity for China to gain more influence in Africa.
Just last week, Reuters reported that China’s President Xi Jinping announced another $4 billion of investment into Nigeria’s economy.
We have no doubt more will follow… and that Nigeria will get access to more yuan if they can’t get access to more dollars.
It’s not quite in the same league as the subprime “liar loans,” but it’s enough to raise an eyebrow. The Wall Street Journal reports, “Lenders have a proposition for home buyers who can’t stomach an 8% mortgage rate: Buy now, and refinance later for free.”
We get the attraction. But we can also picture the enthusiastic salesman offering his forecast for interest rates…
Telling the prospective buyer they need to buy now because house prices are going up… and not to worry about the higher mortgage rate because the Fed will cut rates within a year or two.
Or maybe we’re just too cynical.
Today’s top gaining ETFs…
WisdomTree Japan Hedged SmallCap Equity Fund +3.49%
Franklin FTSE Japan Hedged ETF +3.10%
iShares Currency Hedged MSCI Japan ETF +2.93%
Wisdom Tree Japan Hedged Equity Fund +2.86%
Xtrackers MSCI Japan Hedged Equity ETF +2.82%
Today’s biggest losing ETFs…
KraneShares MSCI China Clean Technology ETF -3.08%
VanEck Gold Miners ETF -2.69%
KraneShares Electric Vehicles and Future Mobility Index ETF -2.56%
Global X MSCI China Consumer Discretionary ETF -2.27%
iShares MSCI Turkey ETF -1.81%
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Editor, The Daily Cut