The market’s been going through the meat grinder these past couple of weeks. And since the recent lows were hit on January 24, both bears and bulls have been getting slaughtered.
And that’s likely to continue until the next big Fed meeting in March.
That meeting will be a “live” one, meaning we’ll probably get a 25-basis point rate hike, or 50 if the Fed wants to send the market a message.
But for now, the 10% correction has already been had by the bears.
They finally got their “I told you so” moment…
Yet, after the biggest intraday reversal since 2008, the market is up 9% from its lows last Monday.
And that’s factoring in Facebook’s (Meta) 25% earnings disaster.
Right now, it’s looking like the relief rally we warned about is coming to an end.
But, long-term investors shouldn’t worry too much…
Even though things are looking dicey, bleak, and uncertain… Half the time, market pessimists don’t know why they’re right in the first place.
As the saying goes, “even a broken clock is right two times a day.”
That’s because the “permabear” has a psychological flaw that uses the market as a punching bag…
It isn’t rooted in mathematics, statistics, or financial theory.
Think about it… Over the long term, markets have to rise – it’s a mathematical fact.
Even if there’s no growth, inflation alone guarantees that earnings will rise over time along with stock prices.
Obviously, it has its dips… but then it all rises again.
You see, real traders can bet both ways, and the best can even identify when a meat-grinding market is about to start sending false signals – chopping up bulls and bears alike.
Most of the time, it’s just a matter of having situational awareness.
Let me explain…
The market fell 10% this year after being at a price-to-earnings (P/E) ratio around 25 – “dot com” bubble territory. Now, we’re entering a period of monetary tightening (which is bad for stocks).
It’s laughable to think that the relief rally sending stocks up 9% from their lows last Monday would take us back to all-time highs. Especially when the market is pricing in five rate hikes this year.
For now, all-time highs are not in the cards… but neither is another 10% drop.
That’s why yesterday Jeff Clark said we’re in for a choppy ride… And why I called for an end to this relief rally that we knew was coming.
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Even though the S&P 500 blew past that 4520-4540 level I wrote about Tuesday (all the way up to 4590), Facebook’s earnings quickly reminded the market that it’s 2022… not 2021. Traders are no longer eager to buy the dip, instead they look to sell the rip.
The market now agrees that 4520-4540 is the new battle zone.
Over the long term, the market is one big risk compensation model. It’s always slowly churning but the balance remains the same in the long term. Safe assets (like Treasury bonds) return less, while risky ones (like stocks) return more.
The proportion of risk to reward doesn’t change much over time.
Stocks average around 7% a year. And the yield you get on safe Treasuries if you hold to maturity is about 2-3%.
It boils down to human nature – the more risk, the more reward.
Unfortunately, since 7% is just an average that could mean several good years in a row and then a couple of miserable ones. 2022 could be one of those miserable ones.
But real investors know how to wait. The moment to buy will come eventually.
It’s just not here yet.
As I mentioned earlier, like a broken clock, even the permabears will be right a couple of times.
So far, it’s just been one.
There’s another leg down coming in this market. It’s simply a matter of valuations.
Think of valuations like a negotiation… The market will meet in between max fear and max stupidity.
At the worst of the pandemic in 2020 – when uncertainty about everything was at its peak – the S&P 500 P/E was at 14.
Before the selloff in the beginning of January, it was trading at 25.
We’ll oscillate around an average of the two… as we showed in Friday’s essay. When it hits that zone, it’s time to buy.
But for now, err on the side of caution.
Don’t get too bearish. Don’t get too bullish.
Pick the right sectors.
Let our Market Minutes point you in the right direction.
We haven’t seen it yet, but the inflection point is coming.
Regards,
Eric Shamilov
Analyst, Market Minute
Reader Mailbag
In today’s mailbag, a Market Minute subscriber shares their thoughts on the Fed…
I once read the tipping point for the Fed to be unable to pay its debt of $24 trillion. Somehow, we exceeded that and are still afloat. I’m not sure how long that can be sustained but yes, at some point the debt service is more than they take in.
And while geopolitical strife helps the dollar as foreign governments – and banks run to safety in the U.S. dollar and out of everything else – that’s short term. Then it’s all downhill, in my opinion, as the Fed is trapped and can only print money to stay afloat and devalue the dollar.
Eventually, they must return to the gold standard. But they’ll delay that as well, and then it’s going to be more painful. It’s a mess. A housing crisis is looming but it’s mostly because of inflation in rents, mortgages, and housing prices going up. Demographics play a role in that. But eventually the housing bubble will pop again as defaults increase. Don’t buy real estate now. It’s a blow off top.
I’m holding onto my gold. Is it Armageddon like Bill Bonner believes, or is there a ray of sunshine on the “other side” after the crash as Dyson and Rickards think? I don’t know. Nobody knows. We can’t predict everything. Just look at PayPal, it’s a dumpster fire. Who knew?
– Anonymous
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].