When Will the Stock Market Balloon Pop Again? There is a time honored theory that the stock market (SPY) is quite like a helium balloon. Discover what that means for what stocks are doing now and in the...
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There is a time honored theory that the stock market (SPY) is quite like a helium balloon. Discover what that means for what stocks are doing now and in the months ahead. Read on below for the full story….
By far the most popular article I have written in years was from last week because it crystalized what so many of us are feeling. Here it is again:
Unfortunately, everything said then is just as true now. That being that the only trend is NO trend. And that is true even after a few solid days in the plus column.
Gladly, we can add a few key updates to help us plot our trading plan for the days ahead. That is what is in store in this week's commentary below...
Market Commentary
Let's start with a helpful analogy that will frame our discussion today. And that is to appreciate that the stock market is quite similar to a helium balloon.
Meaning that its natural state is to float higher unless it is being held down by a stronger, negative force that pushes it lower.
Please read that again so it sinks in.
Now if we pull back to the big picture, we can easily appreciate that state of floating higher is true because 85-90% of investment history is framed by bullish conditions where going up is more likely than going down. However, we find this picture to also to be the case during bear markets when negative events are removed.
Consider the start of the year...how the market climbed day by day in January. Perhaps it was because there was really nothing negative to hold stocks down.
Next comes February with an increase in hawkish rhetoric from the Fed which starts to reign in some of the early enthusiasm. Next comes about concerns of a potential banking crisis and stocks get pushed down lower and lower on each wave of negative headlines.
This had stocks giving back all the 2023 gains by mid March with a closing low of 3,855 stocks. Amazingly from there we have gotten served up a +6.6% rally for the S&P 500 (SPY) to where we stand today.
Was it because of something positive?
No...just the lack of more negatives to hold down stocks. That's all it took for them to float higher once again.
Now let's start looking ahead. Because if we can clearly see if there are more negatives or positives ahead...then we can appreciate where the balloon (stock market) goes next.
I spent some time researching economic forecasts from a variety of sources. Sill 60% of them are calling for a recession forming in 2023 leading to a deeper bear market.
Most of the other 40% are not really calling for a gangbuster growing economy. They see it more in the stagnant growth category.
Stagnant is not exactly bullish my friends. Nor is it bearish. It would most likely equate to a continuation of the activity we have seen so far in 2023. That being range bound with unsettling volatility.
I wanted to share 2 of the forecasts I found most interesting starting with the Conference Board which provides a pretty typical recessionary call. They see the bad times starting in Q2 of this year with -0.9% GDP getting worse in Q3 at -1.8% followed by -0.6% in Q4 before things improve next year (See their full forecast here).
Yes, they see inflation coming down which is what the Fed was hoping to accomplish. Unfortunately employment also cracks and doesn't get better til the middle of 2024.
How accurate do I believe this to be?
Close enough because economic forecasts are highly difficult to dial in perfectly. The point being this is likely a fairly mild recession that should still be plenty harsh enough to get stocks to head 15-20% lower from here. And yes, the more painful the future recession...the more stocks would go down.
Now I want to turn our attention to some of the extreme views out there like the famed Jeremy Grantham talking about the bursting of an "everything bubble" that could lead to a 50% peak to valley decline for the S&P 500 (SPY). (Read about that here).
However, lets remember that Jeremy Grantham is a perma-bear. And like a stopped watch he is only right twice a day...and amazingly wrong the rest of the time. So for as interesting as it may be to read outlooks like these, please do take them with a grain of salt.
In the short run, I expect stocks to remain in the same trading range we have seen all year long with a low of 3,855 and high of 4,200. Most every move in that range has proved to be meaningless noise not predictive of what comes next.
We will break above when more people are convinced that fears of recession are overblown. And we will break below if indeed the recession does come to town.
This is all to say that a focus on the fundamentals is still the key. Like paying attention to the slate of key economic reports next week like:
4/3 ISM Manufacturing
4/5 ISM Services
4/7 Government Employment (with focus on wage inflation)
And after that will be a focus on Q1 earnings season.
Will enough clues emerge in April to make us break one way or another?
Probably not UNLESS a new rash of banking failures emerge. That could create a Jenga moment for stocks to tumble lower as risk taking would go out the window.
At this moment I still believe odds of recession and deeper bear market are around 70%. This explains why I continue to manage my newsletter portfolios for that greater bearish possibility.
What To Do Next?
Watch my brand new presentation, REVISED: 2023 Stock Market Outlook
There I will cover vital issues such as...
- 5 Warnings Signs the Bear Returns Starting Now!
- Banking Crisis Concerns Another Nail in the Coffin
- How Low Will Stocks Go?
- 7 Timely Trades to Profit on the Way Down
- Plan to Bottom Fish for Next Bull Market
- 2 Trades with 100%+ Upside Potential as New Bull Emerges
- And Much More!
If these ideas concern you, then please click below to access this vital presentation now:
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Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced "Righty")
CEO, StockNews.com and Editor, Reitmeister Total Return
SPY shares . Year-to-date, SPY has gained 7.46%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as "Reity". Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity's background, along with links to his most recent articles and stock picks.
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