For the last four or five days I have had people ask me, is this the time to get back in or will there be other chances to pick a bottom? Giving investment advice like that is a precarious thing. You are right sometimes and you are wrong sometimes and trust me, when you are wrong, people are much more vocal than when you are right. With that being said, I try not to give specific investment advice. I like to first give my opinion as to what I think is going on presently, what may potentially develop in the future and sometimes explain what just happened. I try to do it honestly. No one is giving me money to invest. I am not looking to build assets and become some late blooming hedge fund or private equity millionaire. I just call it as I see it and try to make seemingly complex scenarios into something a little easier to understand.
This is one of those times where I will try and look at the recent past and parlay it into the present and future of where the markets are going.
Last week was a nice week for investors and since there have been so few of them, I hope everyone relaxed and stopped looking to fire their wealth advisor. I am pretty sure the advice you have been getting is more about have a steady hand and resist the impulse than about “sell Mortimer sell.” Very good advice indeed. Long term success is the result of that steady hand. Don’t forget that.
Enough with my pitch for the value of a wealth advisor.
Mark my words, the next two weeks will be a very good gauge of how the market will do for the rest of the year. Several reasons why. I think we have seen a fairly rare event as far as market technicals are concerned. A triple bottom. I think I may have discussed the possibility a week or so ago, but last week ended with a rally off of that bottom and as I just said, the next two weeks will show our path for the next six months.
If this rally breaks down and retests the recent S&P low of 3666 watch carefully. More than likely that test will not hold up and we will see a much deeper push into bear market territory. The next stop might be the 3200 level and that folks, will be very painful. Conversely, retracing the horrible May stretch is entirely possible. Most triple bottoms hold and a rally usually holds up.
However, this is not your typical technical joyride. While technicals are fun and interesting and a challenge, that fact remains that what has happened in the past month and a half is not some textbook technical exercise. The fundamentals are, I believe, more important at this juncture.
There are a lot of powerful crosscurrents going on here. The market was over priced and due for a correction. Earnings will not be anywhere near where they were last year because of inflation and a host of other factors. Inflation is going to moderate at some point in the next 6 to 9 months and there is a possibility of a recessionary period as well. Yet, the labor market is tight and people are still spending. The high price of oil has not actually slowed the amount of driving and the airlines, which truly are an American Horror Story, are still booked solid even though they are bending people over and giving them little in return.
It’s a mess for sure but the good news is that like every other time the economy has been messed up beyond belief, it always seems to come back, many times stronger than before and I do believe that is what we will see in the coming months and years.
In the meantime it is going to be very tricky navigating all the potholes that are in front of us. The biggest pothole, and it has hardly been addressed is the housing sector.
Over the years, I have become some sort of mini expert on housing and oil. I am not sure how housing expertise came to be but my oil expertise was by chance. You may not know this but for years, I was the go to guy in New York for Chinese TV when it came to discussing the oil market. I got roped into it one because one the Chinese reporters had asked me if I traded oil,I said yes. They didn’t realize that I traded Exxon and not some oil futures or option contract. Oh well, they asked, I delivered and for years all three Chinese networks on the trading floor would periodically have me go over the oil market. Surprisingly I was right a lot more than I was wrong and they loved that.
Housing was a different matter altogether. I learned about it and saw how it’s significance played a major role in the economy and even though it is a very slow indicator of health, it is almost always spot on and I love accuracy almost as much as I love simplicity.
Doing a little bit of a deep dive into the recent housing numbers has not really left me with anything too convincing. Yet. The talking heads all say the same nonsense, rising interest rates will impact the housing market most and that will slow the down new home sales, existing home sales and so forth. Sorry. I don’t buy that one for the simple reason that rates, even now, are still at the lower end of the historical scale. A 300,000 dollar mortgage at 5.25% is about 265 dollars a month more than it was in June of last year. Sure its more money but if a new family wants to buy a home 200 or 300 dollars a month is not going to slow them down. If they can’t afford the increase they may try finding a house that costs less but the reality is, if a family wants a home, they will buy a home and make adjustments. Two percentage points higher may suck but they are looking at it differently. Houses will sell. Prices may come back to earth a little but housing inventory will be ok. The thing that stops people in their tracks as far as home ownership is not interest rates or housing prices, it is job security. When there is a risk as far as job security is concerned, then you will see inventories rise, prices will fall faster and even though the government is raising interest rates, the supply side of that loan origination will force rates lower. It’s all about jobs.
Everything has held up fairly well even though things are teetering a bit. People feel they are not as wealthy (on paper) as they were last year and their spending habits might change somewhat. That is where a potential recession comes in. People reign in spending, producers reign in producing and you have a recession. But recessions don’t happen unless there is that weakness in the housing sector and while I think things are slowing down a bit, the impending recession may be pushed back a bit.
Don’t get me wrong, I still think we will have a recession. Not so sure how deep and long it will be but I think it is coming. You can thank the Fed for that but I blame them for coming late to the inflation party, I think they are doing what they can to keep inflation under control and eventually suppress it. In May of 2020 I would have given them an F-, today its a solid D.
Where does that leave us as investors? Fortunes have been made during recessions as well as in boom times. It’s all about your perspective and your appetite for risk. Investing going into a recession is risky but with backbone, money can be made. If you are already fully invested and your fear level is up there, take advantage of the rallies if your so inclined and do not, I repeat do not listen to the market gurus. They only put on market gurus who’s stories fit with the present days news. You only saw Jeff Gundlach telling everyone that Lehman and Bear Stearns were frauds after all the damage was already done. He shorted those stocks way before you ever even heard of him. He became a star of the day after he made 300 million dollars for his investors.
Think honestly about the mind of an investor like Jeff. Why would I let the world know what I am doing before I finish doing it? He did all the work to uncover the whole mess and risked millions of his investors money shorting those two companies, why would he let you know what he is doing until it is already done. Media presents people when people want to be presented not when their audience needs to see them.
Just another tidbit to think about.
Hi Peter, today was a well written thought process by you, but I think you might be a bit off base on home interest rates in home buying as most forget and you failed to mention the point of down payments plus the increase of added 2.75% on a monthly payment. So, when you factor in a 20% down payment at $60,000 on a $300,000 house, the same house that was $200,000 last year, the reality of this kicks in for a new home buyer, not the one that is trading up or down.
Regarding the market, I feel most earnings will remain strong, possibly not as high as a year ago, but for most consumers are still spending the liquidity built up during the two years of pandemic. However, you only need to look at the butcher. Are to see people are not buying steak, but more pasta and the creative meals learned by being cooped up for 2 years, so I feel the consumer today are much wiser and will ride the highs and lows accordingly.
Recession? It may just come and go, as mentioned above nothing more than the ocean, up and down, but it will hardly affect the normal consumer household.
Government gas holiday is a total charade, the average driver, doing the math which I won’t in this, equates to about $28 a month, not enough to change driving habits, $2.50 a gallon to $5.00 a gallon only pisses people off but not much more than that. Olive Garden had higher than expected earnings, reflecting the consumer is still eating out at their affordable restaurants…… pasta, Mexican
Chinese, steak house and higher end restaurants are all booked up, by “us”, those that can afford a $50 steak, still pissed off at a $20 increase , while ordering anyway !
What we are in agreement with or at least normal people, is the government, each and every part, beginning with the Supreme Court and their firestorm rulings of, why not leave what has been on the books a century alone, alone? We are now having to navigate hateful Diatribe, all for political gain, chasing Trump down as a lynch mob, for why ? just political theater……. Summarizing the whole world is f**ed up, but we will survive, just don’t fly …. Drive !
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Just some of my thoughts generated by yours, and hope to see you soon Peter !
Peter, I've been enjoying your posts, but you are way off base here. 30-year mortgage rates have gone from roughly 3% last June to 5.85% currently. On a $300,000 mortgage that is an increase in monthly payment from $1,265 to $1,765. If you think that difference doesn't matter to the typical American household, then I've got news for you. That is a MASSIVE difference for a 2-income household with a combined income of, say, $135-175K. You and I might spend that difference on a really nice bottle of wine, and not even check our Amex statement. But for ordinary working-class Americans, living outside the NY-DC-LA-SFO metro, it's the difference of around $25K in annual income needed to qualify for the mortgage. In other words, it's the difference between qualifying for that mortgage, and being totally priced out of the market. Go ask a school teacher or a cop in St. Louis,Missouri if $500/month matters.