Jerome Powell is trying to be clear, and traders have their heads in the sand.
The Federal Reserve chairman used the word “pain” eight times in last week’s press conference. He reminded everyone that:
Higher interest rates, slower growth, and a softening labor market are all painful for the public that we serve. But they’re not as painful as failing to restore price stability and then having to come back and do it down the road…
Stocks sold off on his comments, making an already lousy week for stock prices even worse. But I’m sorry to say, that’s not even close to the end of the pain for the market.
Analysts don’t seem to have gotten the message. Their expectations for the economy next year can be graciously described as deluded. And if you’re listening to them, you could make the exact opposite financial decisions you should be making right now.
Let me be perfectly clear: This bear is NOT over. The bottom is NOT in. And Wall Street analysts are painting a dangerous picture for any investor naïve enough to listen to them.
And today’s True Options Masters is all about proving that point to you, and showing how you need to trade if you’re going to come out the other side of it a winner.
Wall Street Analysts Are Kidding Themselves
Wall Street analysts are either fools or liars when it comes to next year’s estimates. Maybe both.
Analysts expect earnings for S&P 500 companies to grow almost 13% in 2023. They expect a dip of less than 2% in earnings during the recession.
History tells us that estimate is gratuitously optimistic.
The chart below shows earnings per share for the S&P 500. Previous recessions have seen earnings fall significantly. Recovery after the dip also takes time.
Source: Standard & Poor’s
(Click here to view larger image.)
I added a trendline to the chart to show the long-term trend. Earnings generally stayed near the dashed line. That changed in 2020 when government stimulus and the Federal Reserve money printing broke the economy. Earnings soared as cash flowed to everyone.
We should expect earnings to move back toward that dashed line. The question, naturally, is when.
I believe the move has already started, and will only accelerate as we head into next year. I’m far from the only one who believes this.
Almost every CEO expects a recession. About 65% of consumers believe we’re already in a recession. Even Powell believes a recession is possible.
Last week, he said, “…the chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive or restrictive for longer.” (Soft landing is Fed-speak for a decline in inflation without a recession. That’s unlikely now.)
Recessions decrease earnings. That just makes sense. Unemployment rises, consumers spend less, businesses invest less. The contraction in spending slows the economy. It also reduces sales and profits for businesses.
The next chart offers details of the five earnings declines since 1988. Four of the five (in 1991, 2001, 2009, and 2020) were associated with recessions and bear markets.
In 2016, the economy avoided recessions. Large-cap indexes lost less than 15%. Techs and small caps lost more than 25%. Even though it wasn’t an official bear market, it was a tough market to trade.
(Click here to view larger image.)
The median measures the middle value. It gives a more accurate value than the average when there’s an outlier negative performance like there was in 2009.
History tells us to expect a 24% decline in earnings. Analysts project a decline of less than 3% in 2023.
There are few things we know for sure in the markets. I do know one important thing – analysts are wrong about 2023 earnings. Estimates are too high. The recession hasn’t even officially started, and earnings are already declining.
I’m looking for retailers to start telling us holiday sales are disappointing. Then the analysts will start cutting estimates. By the time we’re done, earnings will fall at least 10% and probably closer to 20%.
Lower earnings are important. They mean stocks are worth less in analysts’ models. As research comes out with lower price targets, selling pressure will build. That part of the bear market still lies ahead of us.
Traders thinking every rally is the end of the bear market are ahead of themselves. New lows are in our future. Smart traders are preparing for that.
Thankfully, you’re in close company with one of those smart traders. And he’s preparing for this bear market just like he has for every other he’s seen in his 35-year trading career.
Mike Carr’s Bear Market Mastery
Mike Carr has traded bear and bull markets for well over three decades with a simple, one-ticker trading strategy.
He makes this same trade, on the same ticker, every single week.
With this ticker, he can exploit the extreme volatility we often see in bear markets, turning periods of maximum pessimism into powerful short-term profits…
This year has been no exception, with this one-ticker strategy producing a 78% return this year while the S&P 500 has fallen 20%.
And over the years, he’s made his subscribers gains of 89%, 142%, 225%, 300%, even up to 650% in a matter of days.
Mike is about to go live with the latest iteration of this one-ticker trading strategy.
Why now? Because he’s sick of the “BS” (his words) that continues to stream out of the mainstream media’s mouths about what’s really happening in the economy and markets this year.
He’s fed up that they’re dancing around the reality, and baffled that nobody is willing to step up and tell everyday people what’s at stake…
So, on November 15 at 8 p.m. ET, he’ll do just that.
Tomorrow, you’ll get the chance to join Mike for this special broadcast before anybody else. Stay tuned to True Options Masters for all the details.
Amber Hestla Senior Analyst, True Options Masters