Following the stock market these days feels like watching a never-ending tennis match – swing after swing with no end in sight.
After an exciting few weeks and the Dow posting its best October in U.S. market history, up almost 15%… We’re back to declining prices in November.
Some of that is thanks to the Federal Reserve announcing a fourth 75-basis-point interest rate hike in a row. That makes it six raises this year.
As we’ve been telling you in these letters, the Fed has made it very clear it has no intention of slowing down its plan to continue raising interest rates to help tamp down inflation.
So this news and the resulting volatility didn’t surprise us.
But for those investors who were hoping for smoother days ahead based on the market’s October performance, I want to share some research from my analyst Adam Galas that’ll clue you in on what’s ahead.
At Intelligent Income Daily, we want to help guide you through the market ups and downs. And by sharing Adam’s research on what’s coming… Our goal is to help you maintain – and grow – your finances throughout it all.
Short-Term Investors Shouldn’t Feel Comfortable Yet
The question on many investors’ minds is whether these extreme market moves are based on company fundamentals… or overall stock market technical indicators.
Here’s Adam with some context on why we saw a rally over the last few weeks:
Morgan Stanley recently won an industry award for the best portfolio management of 2022, thanks to its brilliant “fire and ice” theme that has, thus far, been spot on with this bear market.
“Fire” = inflation and soaring rates constricting stock multiples
“Ice” = slower economic growth hurting earnings, providing the final catalyst for stocks to bottom
The night before stocks started screaming higher, Mike Wilson, Morgan Stanley’s chief investment officer, put out a note predicting a potential 13% to 19% stock market rally in the coming weeks.
Why? Due to short-term oversold conditions, hedge funds have shorted many blue-chips stocks in recent weeks. These kinds of big money bets – that stocks will keep falling – can trigger short squeezes, a major reason bear market rallies happen in the first place.
Morgan Stanley’s quantitative analysts predicted the S&P 500 could rally to 3,950 to 4,150 before the rally petered out and reversed.
And that’s similar to what we’re seeing now. After hitting 3,901 late last week, the S&P 500 is again in a downward trend.
But thanks to other seasonal events – like the holidays and elections – we expect to see more swings based on technical indicators, both up and down. So don’t get too comfortable yet…
A Bit More Pain Ahead
The bad news for investors hoping the bottom is in… is there’s a simple reason it probably isn’t.
The bond market now agrees with Bloomberg, the Conference Board, and 80% of CEOs that a recession is coming in 2023.
And they’re predicting a final bottom after we decline 30-40% from record highs. Which is still 13-25% lower from where the S&P 500 sits around today.
That might sound terrifying and demoralizing, but there’s some good news. From Adam:
Morgan Stanley and Royal Bank of Canada, who have been extremely accurate in this bear market, expect the market to bottom in Q1 of 2023. So in about four to five months.
That’s because February to March is likely to see many companies provide conservative 2023 guidance, and the Fed is expected to stop hiking rates in March.
The end of Fed rate hikes, along with a likely painful Q1 earnings season, is a reasonable catalyst for a final market bottom, assuming a mild recession next year.
Goldman Sachs thinks the final bottom will arrive in the Q2 earnings season around mid-year because it expects the recession to start later than Morgan and Royal Bank of Canada.
So after 12-18 months of the market declining, the experts agree we’ll likely start coming out of the woods.
And here’s more good news…
Since 1961, the market’s declined 25% or more only nine times… and in every instance, it went on to see an average gain of 22% over the next year… 83% in the next five years… and 214% over the next 10 years.
In other words, if you buy in a bear market like this one, even if stocks keep falling (as they usually do in bear markets)… Within a few years, you almost certainly won’t care where the final bottom was.
So bottom line:
The recent volatility is largely technical in nature (not driven by fundamentals).
We’re likely in for a few more months of market pain.
Buying blue-chip bargains in a bear market like this is the best way we know to achieve your retirement and other long-term financial goals.
If you can stay calm and rational in this bear market and hold on to the best stocks in the world – or use this opportunity to add them to your portfolio – in a few months, you’ll be thankful you did.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily
P.S. Some of the best stocks I know are getting swept up in the volatility we’re seeing today. And once we emerge from it – which, as Adam showed above, could be in just a few months – their prices should soar higher.
Right now, you have a rare opportunity to add some of these names to your portfolio at an incredible discount. My model portfolio of over a dozen stocks are nearly all trading below our recommended buy prices. Click here to learn how you can access their names and take advantage of today’s unique setup.