Video Update: How to Be a Stock Market Genius – Even in a Recession

Since the start of the year, the stock market has been on a tear, with the S&P 500 up almost 20%.

But before we start the celebrations, there are a few things we should be aware of to see the whole picture.

In this week’s video update, Chief Analyst Adam Galas shares what the risks of a recession are today, what we could see in the near future, and how we can prepare for the rest of the year.

He’ll cover the steps you need to take to emerge a stock market genius – even if (or when) we go into a recession… And allow you to sleep well at night, knowing your retirement future is safe.

Click the image below to watch the video or scroll down to read the transcript.

Happy SWAN (sleep well at night) investing,

Brad Thomas Editor, Fortress Portfolio

Welcome, Fortress Portfolio members to another weekly update.

Today, we're talking about how to be a stock market genius in an idiotic market.

Now, I've been telling you for months about how we should celebrate bear markets.

We should embrace them as a lover, because when they end, we get a face ripping, Buffett-style, bear market that makes everybody feel like a stock market genius.

Now, it's been a heck of a year. The S&P 500 is up almost 20%. The Nasdaq's up 40%.

Good times are back, baby! Let the good times roll.

But there is, of course, a problem…

After the market bottoms, the average gains are about 50% historically in a year. The median is above 40%.

So we are certainly on track for that.

However, the chances of this being a new bull market are quite small.

And the reason is that all data is pointing to the fact that this is almost certainly a recessionary bear market.

And guess what? From this standpoint, we now know the recession has not started yet.

Since 1929, there has never been a recessionary bear market in which stocks bottomed before the recession began.

As of right now, stocks bottomed in October of 2022.

And it looks like the recession won't begin until the first half of 2024.

Specifically, the bond market thinks it will be April of 2024.

Well, that would mean the stock market would bottom 18 months before the recession begins.

Now, let me show you why this is almost certainly ridiculous.

In every recession, earnings decline (as you would expect when the economy is contracting).

However, let's take a look at what the stock market is currently baking in.

More specifically—what do investors think is going to happen to earnings in 2024?

Remember the data says we're going to have a recession in 2024.

Well, analysts currently expect 12% earnings growth next year in a recessionary year. That would be unprecedented.

In fact, it would be insane.

That would be something like a magic unicorn’s pixie dust. It doesn't exist.

Now I know what you're thinking... How can you be so certain that there's actually going to be a recession?

What if the stock market says there's not going to be a recession? And the Fed is able to pull off a soft landing?

Okay, that's quite possible.

But we have to remember that 9 of the last 12 recessions were caused by the Fed.

3 times out of 12, the Fed did manage to cool inflation without causing recession.

But was never was the Fed able to cool inflation when it got as high as 5%. And this time it started at 9.1%.

Now I spend two to three hours per day, five days a week, months on end, looking at about 150 economic charts per day.

This is so I can get a complete big picture… God's eye view of the economy…

Just so I know – if this recession is actually canceled or just simply postponed.

Now, there is one specific piece of data that speaks volumes. And it’s from the New York Fed. It is based on the most accurate recession forecaster in history, the three-month ten-year yield curve.

The New York Fed's model says that in the next year, there's a 60% chance of recession.

But this is the highest recession risk in the last 42 years. Higher than the pandemic, and higher than the Great Recession.

And the yield curve itself (which has never been wrong since the early 1950s) says there is a 100% chance of a recession by July 31st, 2024.

Now, this is just one of the reasons why a recession is all but certain.

In fact, Deutsche Bank just put out a note saying that it would be historically unprecedented for us not to get a recession.

And to let you know just how idiotic the stock market is being, I am going to reference a valuation chart.

Now this data is comparing the S&P 500 earnings yield to Treasury yields.

In other words, compared to bonds, how attractive is it to invest in the S&P 500?

Well, right now is the least attractive time to invest in the S&P 500 since 2007.

Now, this is based on just one valuation metric, but all the data is basically saying the same thing.

So what is the market's valuation?

Now, remember, valuation only tells you the reward to risk ratio. Or how smart it is to buy stocks.

It will not tell you when stocks will bottom or peak. It is not a timing tool, but it does essentially forecast what returns you are likely to get over the long term.

Well, right now, the forward price to earnings (P/E) ratio on the S&P 500 is 19.2.

This is compared to a 25- and 45-year average of 16.9.

Now, I know what you are probably thinking… Maybe this time is different? Maybe interest rates are different?

Well, let's consider the zero-rate era.

Remember when interest rates went zero, money was free. And everyone said, “Well, stocks can go to the moon because there is no alternative.”

Well, guess what the average forward P/E ratio was in the decade of free money? 17.3.

It went up a little compared to the 25- and 45-year average P/E ratio of 16.9.

But 19x earnings never made sense. Even when money was free.

And right now, interest rates are at 5% and the Fed says they're going to 5.5%.

But remember, that's based on current earnings estimates.

And those current estimates predict that earnings during a recessionary year are going to go up 12%.

That's absolute insanity.

But let me highlight a bear market scenario table.

Now, remember, historically in a recessionary bear market stocks will bottom at between 13x and 15x trough earnings. So far the bottom occurred in October when the P/E ratio was 15.5. This is reasonable if and only if earnings grow as expected… Which they have never done in a recession.

This would essentially require magic unicorn pixie dust.

Okay. But let's be let's be optimistic. What if this is the mildest recession in history, which some economists are expecting…

What if, for the first time ever, earnings do not shrink, they're just flat. Basically, they come in as expected.

Remember the magic pixie dust scenario?

Even then, a midrange P/E ratio of 14 or 14x trough earnings… Means stocks would fall 27%.

Now, the actual Wall Street consensus is that stocks will fall about 31% with a peak decline from record highs of 36%.

Now, if it's an average, recessionary, earnings decline of 13%... That's a 36% decline from here.

And Morgan Stanley (MS) (who does not even think there is going to be a recession) is predicting earnings will fall 20%... Which would result in a potential decline of 42%.

Now, let's just consider the Wall Street consensus – a 36% peak decline, 31% drop from here. That is a historically average recessionary bear market.

But let's think about this. We've just had six months in which the stock market suggests that everyone’s ones feeling fantastic.

We have had all these crises. We've had the banking crisis, craziness in bond yields, and the Fed basically going back and forth with the debt ceiling crisis.

Yet the market doesn't seem to care. It suggests everyone's feeling fantastic.

Now imagine a 31% decline for the market over the next roughly nine months or so.

Well, in 2022, we had a 28% decline in nine months. How did that feel?

For most people, that felt like hell. Well, this this would feel even worse.

In fact, with the market getting somewhere close to its record highs, everyone’s complacent.

Everyone's been lulled into a false sense of security.

Well, most people, certainly not you… At least the goal is that you won’t be with these video updates.

But the point is this, even average bear markets never feel average. That's because when the average bear market happens, bad stuff is happening.

In this case, we're looking at a recession. We're talking about earnings that are declining.

We have companies going bankrupt. And there are zombie companies that the Fed is killing off on purpose.

So the point is, right now in the short term, stocks are cruising for a bruising. Riding for a sliding. And rushing for a crushing.

But I want to be very clear. I am not a perma bear. I am not a doomsday prophet.

I am not Robert Kiyosaki, mister starvation is coming. Mister God have mercy on us all.

No, Mr. Kiyosaki, I would hope that God would have mercy on the children in foreign countries who are actually starving.

Now look, Kiyosaki is famous for his wonderfully despairing doomsday predictions. He is constantly talking all the time about 90+% crashes, and the upcoming “worst crash in history.”

But I do not actually hate this man.

He is like your wonderful, crazy uncle at a party. He's incredibly amusing.

But for the love of God, don't take his financial advice.

Compared to him, Jim Cramer is Warren Buffett, an oracle of finance.

Now it's so important to note that we're looking at around 27% to 30% declines, likely in the next nine months.

You might be thinking, “Oh my God, why are we sitting in stocks at all? We should be in cash or maybe we should be shorting the market.”

Let me tell you why that is the worst possible thing you can do.

According to data from Bank of America, since 1930 if you had missed just ten of the best single day gains of each year, then the stock market's returns go from almost 18,000% to zero.

Now, adjusted for inflation, this is -94%.

Mr. Kiyosaki, there's your 94% crash.

How do you lose everything? By timing the market long enough and letting inflation kill your entire fortune.

Now, you might be wondering, “Okay. Okay. Stocks. Yes, I get it. Sentiment. Long term though, everything we are pursuing a fundamentals driven destiny, right?”

Yes, long term. But the reason that I study the economy so closely and have this God's eye view, is not because economic timing will make any difference.

Even with perfect economic timing – if God calls you on the phone every day and tells you exactly what the economy is going to do… If you can perfectly predict when the recession begins and when it ends, it will not make a difference… Since 1926, it has been proven impossible to beat buy and hold investing… The only exception is if you were alive during the Great Depression.

And let me assure you, if there is a depression coming, I will see it in those charts and I will let you know.

But the point is, the stock market is not the economy.

It is truly time in the market. Not timing the market, but investing in the market itself.

And let tell you one last powerful fact. This could change your life. It did for me.

It is based on data from J.P. Morgan (JPM).

For last 20 years now, the S&P 500 has produced a very solid 10% return, similar to the historical returns of the last 100 years and 200 years, and what analysts expect in the future.

This is essentially what everyone wants. Double your money every seven years.

Glorious.

But the average investor, thanks to market timing, got one third of those returns. The average investor left two thirds of the annual gains on the table.

That's half the returns of a 60/40 portfolio, the most basic kind of hedge fund.

Now, what does that actually mean over a 20-year period?

$1,000 invested in the S&P 500 is worth $5,250 today.

In a 60/40 portfolio, it's worth $4,000.

And with market timing, it’s $2,000.

And remember that those market timers are lucky in the short term, but over the long term, they're basically going to lose everything to inflation.

So FortressPortfolio is a much more advanced hedge fund, better than a 60/40.

And people freak out during historically average recessions, because doomsday prophets like Kiyosaki convince them that this is just the beginning… And the greatest crash is coming.

And at the time those doomsday prophets will not sound that crazy.

But with a diversified hedge fund like we have built with Fortress, you can get great returns during those average recessions.

You can ride out the storms because of low volatility. You can even rebalance into stocks near historic lows, supercharging your returns by an extra 20% per year (providing you with roughly a 60% greater net worth over a 30 year period).

So the message I want to send to you today – is that if you want to be a stock market genius, all you have to do is not be an idiot.

As Warren Buffett said, he is not a genius. He just knows how to find quality companies, buy them at a reasonable price, and then hold onto them for decades.

Let the world's best companies do the work hard for you… So one day you don't have to.

Fortress was designed to deliver 10% to 11% returns.

We're talking market level returns, not 60/40 market level returns.

Market level returns with a 6% to 7% yield and low volatility so you can sleep well at night no matter what's happening. That is the key.

That is why I spent seven years studying exactly how to build these kinds of hedge funds so that you can truly achieve your financial dreams.

I just explained to you why a recession is almost certainly coming, and why It is very likely that stocks are going to fall between 28% and 30% in the next nine months.

Now, imagine you're earning 6.7%. It’s paying the bills. Your income is growing faster than inflation. Your lifestyle has nothing to do with stock prices, only with fundamentals. That's what matters. That's what we monitor for you to make sure that your income is safe.

Now imagine stocks fall 30%. How do you think everyone else is going to react?

They're going to be losing their shit.

They're going to be saying, “My God, my 401 (k) just evaporated. I'm never going to be able to retire.”

While, you, my friend, have already retired. Or are very well on the road to retirement.

And guess what? Your income is not going to be affected.

You're paying the bills. You get to enjoy life. Go out, take a walk. The sun is still shining, baby.

The stock market crashing. It's going to be a few months of pain.

But when it finally bottoms, we will get a new bull market and that 50% Buffett-like face ripping rally.

And unlike the doomsday prophets, I promise you, I always follow the facts wherever they lead.

When it's time to start pounding the table on the S&P 500, we will let you know.

Mind you, we built something better than the S&P 500.

But the point is that when the facts say that it's time to start aggressively buying, we will let you know.

And this is the promise of Fortress – we will lead you to the world's best companies at reasonable prices, providing you with a diversified and risk adjusted portfolio tailored to deliver great income and great returns. And make you don’t have to worry about what is happening in the stock market and the economy.

This is the closest thing you can have to a guaranteed rich retirement.

Now, of course, nothing's a 100% guarantee.

If there is an actual apocalypse, then yes, fortunes will fail.

But if that is the case, then the living will envy the dead and the only portfolio strategy that was actually correct all this time would be those who told people to invest in guns, canned food, and Robert Kiyosaki himself.

Thank you for reading today’s transcript.

Please send in your questions and comments so that I can respond to them in these videos and our monthly issues.

I hope you join us next week when I explain why this crazy market could potentially keep going for another month, why that is going to make things more dangerous, and why you shouldn’t chase it.

Until then, this is Adam Galas, wishing you safe investing you… And your family, a healthy, and relaxing week. Live long and prosper.