Market Outlook March 12th 2023
High level of uncertainty
Important: this is not investment advice. Consult a licensed financial advisor before making any investment decision.
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Hi! My take on the US stock market.
Friday was a panic-like session following the concerns around the Silicon Valley Bank collapse.
Check the link if you want to know more… basically, the 10th biggest bank in the US collapsed and many people and most businesses cannot access their accounts and money.
If the US government and the FED don’t do something before the market opening next Monday things may get really bad.
My take in a nutshell: the credit tightening that has been led by the FED has started to “break things” in the real economy. This will make the FED become more cautious about keep raising rates too fast (already done!) and lead the economy to a crash.
With all this uncertainty my take is that we’ll need some more months to better understand where all the rate hikes will lead the economy to.
Is all lost?
One of the best learnings for me is that the economy and the markets move in cycles and the best course is to be patient.
I am a firm believer that great things are waiting ahead. Not just yet.
I think the technology sector will be leading the markets higher as so many innovations are hitting the real economy, from robotics, automation, AI to name a few.
We are navigating the mistakes made by the FED and politicians which look clueless as they go from statements like “inflation is transitory” to “we’ll raise rates until the job is done” and who knows what they’ll be saying in a few days if the credit markets start collapsing next week. I guess what all those Ph.D. do at the FED if they do not manage to gauge the consequences of their actions on the economy.
What to do then?
Being prepared is what we can do.
Personally having stop losses for each position and reviewing them periodically is one way to stay prepared.
I am not talking about my 10X POTS which are designed to be “buy and hold” forever. In there I slowed down a lot the number of times I added to them over the last 16 months. I will add to them as soon as the market outlook will become more friendly.
Back to today.
Next week anything can happen.
If the FED steps up and the inflation data is better than expected.. the market may rebound strongly. If the opposite happens… we’ll see a market sell-off until the credit market conditions become clear.
More than anything collapses and bear markets are driven by bad credit market conditions, meaning how easy is to get money from banks, individuals, and corporations.
Bad credit conditions = people and businesses cannot refinance their debt or get money to invest in new initiatives etc. The economy slows down, people lose jobs, demand for goods goes downs, businesses make less money, earnings go down and stocks go down… until credit market conditions start to improve again.
The difference, this time, was that we were coming from a strong economy on steroids (money printing like never before plus fiscal stimulus from the government).
The question of how much damage the change of course from the FED will inflict on such a strong economy is still unknown.
These are very unprecedented conditions.
Here is what has been happening to credit conditions (the black horizontal line is considered neutral credit conditions):
The number of banks tightening standards for loans has been increasing fast and that will have an impact on the economy.
Have a look at how the increase in tightening standards preceded the dot.com and 2008 recessions (grey areas).
A recession looks inevitable. Again, nobody knows its severity because we were trying to slow down a too-strong economy.
Again, the best course is to stay defensive and be prepared for different scenarios.
Going forward I am very optimistic about the technology sector and I’ll be waiting for the right time to add to my POTS again. It might be in a few weeks or in some months from now. Time will tell.
The overall market (SP500) below is now below its 40-week moving average (yellow line) again which suggests moving to a defensive stance.
Last week's closing looks very bad. No way around it. If it stays below the 40-week moving average that would indicate that the downtrend started in January 2022 will resume.
Let’s stay flexible, defensive and see what next week will bring us.
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Important: this is not investment advice. Consult a licensed financial advisor before making any investment decision.