What is going to happen next?
You can bank on it. We are going to have a recession and a bear market in stocks. The only question is how soon. The headline above from Bloomberg gives one major reason. We are now in a situation where we are raising interest rates and reducing liquidity at the same time. The Fed is saying, We will sell you money at a higher price and, oh by the way, we don't have any in stock. Given that and given the flat yield curve from 2-10, we are headed for the wall. All we are discussing now is to finetune the timing. The Fed is saying they are going to drop their balance sheet from about $9 trillion to about $8 trillion in about a year. The last time that happened was in 2018/9 and they also pushed the yield curve negative. The result was the Crash of 2020. You think it was caused by covid? Nope. It was going to happen anyway, covid was just the fire accelerant of a blaze already started by the Fed. | |
So the question is when will the bear market and recession begin?: Typically, a bear market starts about one year after the yield curve inverts so that would suggest next spring. The recession would follow several months later. But I think that it will happen sooner for several reasons: - Faster info flow
- Seasonality
- Ukraine
- Bad policy decisions
I've been trading for 50 years. Back then I traded using a Wall Street Journal from three days ago and sending letters to my broker to trade. No kidding. Now, everything happens much faster. So economic forces affect markets faster. That means that I'll stick with the one year forecast but the error will come from happening sooner rather than later. Normally, we should see a modest rally to the end of April, then a dip larger than the dip earlier in the year, then another rally, and the biggest dip in the year from August to November. Mid term election years are bad for the stock market. So seasonality would argue for the fall dip as being the timing for the Big Bear to attack. But it is even possible that the current bear move of this week is the beginning! | |
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The Ukraine situation and the attendant Russian sanctions are disrupting the global economy. That is causing a significant slowing of the eocnomy caused by dislocations of both supply and demand. Slow economy leads to worse earnings growth. Half of the earnings of the S&P 500 come from outside the US so it will be very affected. Bad policy decisions have led to the current and continuing bout of inflation. 10% CPI, here we come. That is why the Fed is slamming on the brakes so hard. They want to tame inflation. But inflation will continue higher way into 2022. It will hit 10% minimum. We are only in the early stages of the sticky inflation of rent and salary hikes and those hikes will carry inflation through most of 2022. Inflation is now damaging the economy. People are cutting back purchases because of the higher prices. Real wages are declining so people can't afford as much as they could just a few months ago. The Fed ALWAYS goes too far. The have let monetary easing go too far and we have increasing inflation. They will go too far in tightening and plunge the market and the economy into sharply lower values. So what do we do? | |
I've already started my bear campaign. First step has been to buy stocks that do well in the early stages of a bear market which we are in. The second step will be to simply short the market and hammer weak sectors and stocks. I'm starting that now. Want to know my specific trades. Click here to learn more and sign up for my week letter, Wall Street Winners. Winning awards since 1995! Good trading, Courtney Smith | |
Words To Live By ""Why, this is a bull market!" The old fellow said it as though he had given a long and detailed explanation." Wiser words were never spoken! The most important factor in trading profits is knowing the trend and following it. Even counter trend trading has to take into account the trend. | |
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