First off, before we get to the ugly markets and economic backdrop, we wanted to wish you and your families a Happy Independence Day holiday weekend.
Without our freedoms, which include free market capitalism and the right of every investor to play on a fair and level playing field, we would not have the numerous diversified investment opportunities in the public markets that we have today. We hope you enjoy your Fourth of July!!!
Our position has been that the stock and bond markets have stunk since the beginning of the year.
The tug of war as to whether or not we are already in a recession is part of the daily chatter by the media, Wall Street analysts, and every economic commentator.
However, "in or not yet in" a recession doesn't really matter to investors who have experienced the worst market since 1970.
We're with you if you're feeling that way.
Just how bad?
The unprecedented decline in both the stock and bond markets has wiped $15 trillion in wealth out of the US markets in 2022.
We humbly suspect that every investor has, in some way, felt the effects of this decline.
Long-term vital retirement plans, corporate balance sheets, and numerous industries (banking, brokerage, insurance, technology, etc.) are feeling the effects of falling asset prices and higher interest rates.
In June alone, the S&P 500, the Dow, the NASDAQ 100, and the Small Cap indices were all down over 8% for the month. It wasn't pretty.
Fortunately, it's halftime, and this can create an opportunity for change.
Like in many sports, we'd be crazy to assume at halftime in the Super Bowl, at the final turn of the Kentucky Derby, at the turn of the Masters, etc, the leader would be the winner of the game.
It's time to approach the second half of the year with a rational and confident perspective that acknowledges the ugly first half of the game (year), and use it to prepare for the remainder of the year to win the game.
First, let's take a few moments to reflect on the numerous (and often) times we pointed out to "take cover, raise cash, move to commodities and value stocks, shorten fixed income duration and avoid listening to the media, other pundits and especially (and most of all) any financial advisor suggesting you stay the course.
As a brief history lesson, let us go back to Nov. 21, 2021 right before Thanksgiving when we wrote, "Something Stinks". We said "With inflation rising at an accelerated rate and disruptions in the supply chain creating shortages and enhanced demand, everything including milk (baby formula) cars, food products, paint, lumbar, gasoline and especially Turkey are rising at double digit rates, which will eventually wreak havoc in our society. These rising costs are going to (if not already) impose a substantial tax on every American just through their everyday purchase".
Has it gotten better?
Absolutely not. If anything, the past 2 months have certainly exacerbated our thesis from last Thanksgiving.
We will also likely continue to see wild market swings, heavy and frequent sector rotation, pressure on interest rates, and more scarcity and shortages in everything from food and power to gasoline.
A Midyear Recap of Recent Guidance
Let's draw upon some of the suggestions and direct guidance we've given since then. We believe that every one of these would still be useful to put in place if you haven't done so already:
In our Market Outlook, "10 suggestions to thrive during the Mother of All Supply Chain Shocks," we said:
- Follow our weekly narrative and subscribe to Mish Market Minute.
- Don't follow the mainstream media when they tell you to just "buy the dips."
- Learn to buy hedges, whether through options, inverse ETFs, or investments that will grow even if the markets drop.
On Feb.13, 2022, we suggested commodities have emerged as a good bet in these times. If you are a subscriber, you know that many of our mechanical investment strategies were then (and still are) invested in energy, including oil field services, natural gas, and agricultural ETFs. Mish was also investing in Sugar and Wheat ETFs and Oil and made good profits for her subscribers.
On Apr. 24, you would have seen our direct suggestions to make sure you include CASH as one of your most important asset classes. We also suggested if you own stocks with a low-cost basis, you consider selling some or all of the shares to preserve capital. We said, "Far better to pay the IRS than Mr. Market." How many of you were willing to take that action? Mr. Market can be ruthless. DO NOT BELIEVE people when they tell you, "It will come back." It took from 1973 to 1982 for many stocks to come back the last time we saw this kind of inflation/stagflation.
On Feb. 20 we said, "Consider adding some precious metals and mining in your portfolio." We admit gold and silver have done very little since then. But guess what, you would not be down 20% on the year as both of them held their own, and you would have been flat on that investment from Feb. 20.
Recently, before the ugly June 8-10% sell-off, in our outlook we suggested what you can do to protect your portfolio, which included the following:
- Do not chase markets;
- Be patient. Treat cash as the king in an uncertain market.
- Do not be forced by a professional to get or stay invested.
- Develop a plan and stick to it.
Taking Action
"I love quotes… but in the end, knowledge has to be converted to action or it's worthless." — Tony Robbins
As we move into the second half of the year, we don’t see any fundamental reason to believe that the trend of the market will change.
July is often a pivotal month. Like January (i.e. this year), and the sports analogies mentioned above, July can mark a change in the game that can result in a reversal or a consolidation that leads to another expansive phase lower.
So we don’t expect an uneventful summer, but there are ways we can help you have a more relaxing summer…
In every Market Outlook we have written since the beginning of the year, we urge you to:
- Include commodities, value stocks, precious metals, and other alternative investments that are non-correlated with the large-cap stocks that drive the bulk of the market's return.
Market Insights
Risk-On
- Soft Commodities (DBA) got hit really hard and closed below the 200-day moving average as well as the 50-week moving average but looks to be potentially oversold and could be due for a bit of mean reversion. (+)
- Gold (GLD) is still within its sideways trading range, but also began underperforming relative to US equities by the end of this week. (+)
Risk-Off
- Utilities (XLU) roared more than 4% for the week and significantly outperformed the S&P 500, a blatant Risk-Off indication (-)
- Utilities led the week +4.1% followed by Energy (XLE) 1.4%, however only 5 of the 14 sectors that we track had a positive week-to-date performance. (-)
- The highly speculative Semiconductor (SMH) sector -9.3% led the market down, making new lows but not reaching oversold levels according to Bollinger bands on price. (-)
- The New High / New Low ratio for both SPY and QQQ broke down this week, indicating that each index' components broke down. (-)
- The Risk Gauge is still showing risk-off across the board. (-)
- Thanks to this week's selloff, Growth stocks (VUG) are still lagging Value (VTV) on both a short and long-term basis. (-)
Neutral
- Despite the selloff in the market as a response to recession fears, key US indices stabilized Friday and regained their 10-day moving averages. (=)
- The only index that showed positive Volume patterns over the past 2 weeks is the NASDAQ 100 even though it was the worst-performing index based on price over the past 5 trading days. (=)
- Interest rates dropped on the week with Bonds up close to 3% and is short term overbought (=)
- Market internals shows the McClellan Oscillator maintained neutral levels for the SPY, however, Up / Down volume broke down, so we've got a bit of a mixed bag at the moment. (=)
- Volatility (VIXY) is still in a long-term uptrend but closed this week in a weak warning phase below the 50-day moving average. (=)
- The number of stocks above the 10-day moving average backed off from overbought to neutral for the S&P 500 and IWM components. (=)
- Interest rates pretty much improved across the board with the 7-10 year bond (IEF) leading, but showing overbought readings on both price and momentum according to the Real Motion indicator. (=)
- The two big features from Mish's Modern Family are that Semiconductors (SMH) made new lows on terrible relative performance, while Biotech (IBB) continues its strength and is breaking out of its recent compression zone having closed above its 50-day moving average for the past 7 trading days on strong volume. (=)
- Homebuilders (XHB) +0.5% was up on the week, riding on the back of dropping interest rates (=)
- With the exception of Hong Kong (EWH) +3.2% and China (FXI) +0.3%, nearly every other major country's ETF was down on the week. (=)
- Oil (USO) stabilized this week despite still underperforming US Equities on a short-term basis, giving a mixed read on inflation. (=).