Stock Market Just Passed Recession Test
Four weeks ago, the stock market was at an important foundation level. Since then, high volatility and widespread recession warnings tested investors’ nerves. The test just ended with the stock market back above that foundation level. Here’s the picture…
Now is when reality replaces guesswork
Remember: The stock market is the best leading indicator of what’s coming. Its recent volatile but positive action at the selloff bottom (as investors endured a flood of recession omens) is especially noteworthy.
Importantly, the good results are happening in the earnings season, when reality overtakes guesswork. Moreover, Wall Street is now fully into forecasting 2023. The third quarter 2022 is in the past, and the high-GDP-growth fourth quarter is here. That opens up 2023 to broader analysis and forecasting.
Negativity’s happy result: All positives shine brightly
An old stock market saying goes something like this: When “they” cannot put them (stocks) down any more, they put them up. Applied to today’s market, it means that when repetitive frights no longer produce selling, it’s time to buy because the negativity effect and the market downtrend are over.
The bottom line: Stock investing is a step-by-step process
The stock market is always in a state of flux. Therefore, an accurate view now can become less helpful later. More often is that a view becomes altered, amended or improved as time passes. It also can become more accurate through new, supporting information. What has been happening in the stock market recently provides a good example.
For that reason, I linked my previous five articles (in chronological order) that led up to this one. I have included “The bottom line” paragraphs because they capture a point of particular importance at the time.
“The bottom line: Today’s widespread negativity makes the stock market ripe for a surprise run-up”
“It’s a rule: When ‘everyone’ is bearish, it’s time to own stocks. The simple rationale is that, regardless of the negative fundamentals, the sold-off stock prices offer a good opportunity.”
“The bottom line: Never bet against common sense”
“‘Common sense’ plays a large part in contrarian thinking because the popular rationale at bottoms (and tops) always lacks it. Instead, contrived explanations are created to support the belief that things are not overwrought.
“A helpful sign that common sense is not at work is when you have an absolute feeling that the current trend is here to stay. (At such times, even professional investors get those misleading feelings.)”
“The bottom line – Wall Street wants what it can’t get: Yesterday”
“Yesterday’s gone, but the messes are not. That’s why it’s important not to look for ‘dead cat bounces.’ The strategy of using low-cost debt to produce desirable results is, itself, dead. That tactic can be found in many places besides Wall Street. Even shoulda-known-better operating companies and pension funds got enticed into the easy gain through debt math.
“As a result, index fund returns could be weakened because the passive, own-everything approach. Therefore, a better strategy likely will be investing in actively managed funds – ones where the fund managers and analysts are established experts. They will be focused solely on the future, not on reimagining the good ol’ days.”
“The bottom line – The stock market anticipates, so don’t wait for the dust to settle”
“Often, we hear or read after a major trend change, ‘No one could have known.’ Actually, yes, many investors do foresee what is coming. While it’s likely not the same individuals for each major move, the stars always align for some. After all, someone must initiate the buying or selling needed to reverse a trend.
“So, is now the time to own stocks?
“Looks like it. Even as the Fed continues to raise interest rates and the inflation rate remains high, there are clear, positive changes taking place. Then there is that ‘only visible good news’ – that the inflation rate, while high, hasn’t increased for months.”
“The bottom line – Interest rates aren’t everything”
“…high real rates don’t automatically produce recessions. For a recession (AKA, negative reversal) to take hold, there also needs to be a fundamental reason for it to occur. Typically, such reasons are economy, financial and/or investment excesses or imbalances that require correction. Otherwise, the higher real rates can simply be caused by a healthy demand for capital.”