The market is in front of recession fears.
What am I thinking and doing right now
Important: this is not investment advice. Consult a licensed financial advisor before making any investment decision.
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Hi!
Last week was very important for the market as the new CPI report was released.
I wanted to wait a few days before commenting.
Below is my take on the markets and what to expect in the next few months.
The Macro
The last inflation data released last week brought inflation (Year over Year or inflation over the last 12 months) at 7.1%, better than the 7.3 expected.
Inflation is declining at a fast pace, and at this point, it looks like everybody agrees that it will keep declining over the next months.
Why it matters? This is the first roadblock that needed to be removed and it looks like is under control.
What now? Well, what is not known is when this trend will hit a wall and inflation may become sticky.
So the trend is right, the pace is fast but the roadblock is still partially on the table.
The FED is also mostly concerned right now about avoiding inflation expectations to move higher: the longer inflation stays high, the more people and organizations will expect it to stay around for longer, incorporating price increases in their business decisions, ultimately making inflation stickier and more difficult to eradicate.
In fact, inflation expectations 12 months from today are not pointing down yet, sitting at around 5% (below data from last October survey):
So, we can expect the FED to keep raising rates, as it has been doing in 2022:
More importantly, M2, a measure of the total liquidity available in the system keeps shrinking and it’s quickly returning to a more logical level:
The effect of the tightening is reflected by the worsening of Credit conditions (getting more difficult/expensive to get credit, borrow money, refinance debt, etc.).
Below is the Net percentage of Banks tightening credit standards for Commercial and Industrial loans for large a mid-market firms:
The 10-year treasury rate that indicates expectations of inflation over the long term has been declining, which confirms the overall point of view that inflation is no longer the biggest problem on the plate, at leats in the mid to long term.
So why the market is so nervous?
As mentioned in my previous update, the fog looking ahead is brought by recession fears:
There is no question the U.S will enter a recession anytime between the next 3 to 18 months:
The problem is that there is no clarity on how severe the recession will be and how long it will last.
As discussed in my previous update, we are at a crossroads. If a recession starts to materialize and looks deep/scary, then the market will keep going down. If the opposite happens (shallow recession & inflation keeps going down), then optimism should return to the stock market.
Technicals
Charts are useful as they help in understanding the trends. Here there is no doubt: we have been and still are in a clear downtrend. See the Nasdaq and the SPY500 below:
The Nasdaq is below the 10, 30, and 40-week moving averages, indicating a clear downtrend.
If the index does not manage to stay within the red box, then could quickly move down towards the pre-covid levels at about 9.500 or -10% from current levels.
The S&P500 is also below all key moving averages and every counter-rally has been rejected at the declining red line in the chart (see next chart). Some are predicting that the SP500 may reverse only after a further 20% decline or so from current levels.
Fundamentals
Looking at valuations, most of te biggest companies in the U.S. are properly valued (not undervalued or overvalued), of course with some exepttions.
Which means that without a growing economy will be very difficult to see the market reverse to the upside.
We do not have a growing economy and the main issue is that we are getting closer to a recession. Again, nobody knows how deep it will be.
Conclusion
I think that it does not make sense to make predictions and invest based on speculations about what the stock market will do over the next few months.
Currently, I believe the recession will come and may be shallow. But I don’t know how this will affect the stock market in the upcoming few months. And I don’t know what will happen to the market, specifically by the end of December or January etc.
The best course is to observe what the market actually does.
Right now the market is in a downtrend and we do not know when it will reverse course.
Based on market action, I would recommend to long-term investors, as already shared here in previous updates, to slow down and keep investing. What do I mean by that? If you are investing, say, $1000 per month, make it $500/month or $1000 every two or three months.
This is what I have been doing with my portfolios (POTS) and so far this year I added to them on 3 occasions only.
In the meantime, I keep building my watchlists over the weekends, picking companies with great potential as soon as the market will become more friendly.
As usual I will update you if I decide to add to my POTS, what I’ll be adding and when.
Let’s stay patient and wait for the market to change character.
P.S. Future develpments of this newsletter.
I have fun following the markets and researching to find the next 10X businesses.
Other than my forever & never sell POTS, I am thinking of starting a momentum portfolio where to share buys and sells, targeting investments in high potential companies in uptrends, using fundamental and technical analysis.
The idea is to start with a $10k portfolio (fully in cash) and invest in up to 10 positions (companies), entering the trades as the opportunities arise, keeping these investments for 1 to 12 months or so.
It would be still manageable for me in terms of needed management time and would be more active/dynamic, allowing me to keep learning and sharing my experience here.
I do believe learning to invest in great companies IS the way for most people to participate in the wealth created by the most innovative companies in the world.
I’ll keep you updated. I am running a simulation, testing, and refining the methodology to be used.
That’s all for today! I wish you a beautiful Christmas period and a great time with your loved ones!
And let’s keep patient and wait for Mr. Market to change character sooner than later. For sure we are getting closer to that moment. And amazing opportunities will emerge.
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Important: this is not investment advice. Consult a licensed financial advisor before making any investment decision.