The Next Bear Market II

Back in January, I posted a piece entitled The Next Bear Market In it, I opined that we are in a “secular bull market,”[1] but that another recession is inevitable – though probably a few years away – and now is the time to start formulating a portfolio game plan to deal with it.

Well, yesterday “Roberto Rates” knocked “Sugar Ray Earnings”[2] for a loop, but that has not changed my, nor Raymond James Chief Investment Strategist Jeff Saut’s, opinion: we believe that we are in a long term bull market that still has a respectable amount of time to run.  As Jeff put it today[3] (10/11/18):

Our sense, after writing repeatedly last week that folks should sell trading positions, is that people should get ready to buy . . . .  Our sense is that things are approaching a totally “washed out” level similarly to the February undercut low of 2-9-18.

Jeff also quotes Leon Tuey:

Fear surged today globally. Few realize that the sell-off presents an outstanding buying opportunity as the market is grossly oversold and pessimism is at an extreme (conditions seen at market bottoms). As mentioned in my most recent report, investors should be buying into further weakness as further weakness will cause the market to reverse to the up side.   Earlier tonight, the Dow Future was down 228 points, but has recovered more than 50% at this writing. Clearly, the market is showing downside resistance. Hence, if the market drops further, redeploy cash. A more detailed illustrated report will be sent tomorrow. Remember what Warren Buffett said: “Be fearful when others are greedy and be greedy when others are fearful.” Refrain from joining the crowd.

Here’s an update of some of my favorite leading indicators:

1) The Fed Indicator[4] – Recessions are typically preceded by tight money.  One measure of the degree of Federal Reserve tightening is the Real Fed Funds rate, the difference between inflation and the Fed Funds rate.  The average rise preceding the last 6 recessions has been roughly 5%, with the smallest increase around 3%.  At the moment the RFF has risen 2%.  Another indicator of tight money is the 1-10 Slope, the difference between the yield on 1 and 10 year Treasury securities.  Usually, this goes negative 1-2 years before the onset of a recession.  At the moment it is not negative.  The 1 yr. yield is 2.67% and the 10 yr. is 3.22%.

2) Confidence[5] – Both Consumer and Small Business confidence usually begin declining before a recession. That is obviously not the case now.

3) New Home Sales – The chart below is Year over Year Change in New Home Sales vs. Recessions.  According to Bill McBride (Calculated Risk)[6], who has extensively researched this issue, “new home sales appear to be an excellent leading indicator” and “currently new home sales (and housing starts) are up year-over-year, and this suggests there is no recession in sight.”  The year-over-year increase in new home sales has turned negative and been at a minimum of -9% before each of the last 6 recessions.  It currently stands at +6%.

Bottom Line – Stay the course.  The end is not nigh.

[1] For a definition of a “secular bull market,” see my post of 11/16/17 http://capitalistinvestment.com/2017/11/stock-and-bond-market-update/

[2] For a recap of the contest between interest rates and earnings, see my post The Tale of the Tape and This Correction http://capitalistinvestment.com/2018/02/the-tale-of-the-tape-and-this-correction/

[3] The Earnings Picture Is Getting Complicated https://myrjnet.rjf.com/ResearchandPlanning/InvestmentStrategy/MarketandEconomicCommentary/MarketStrategybyJeffSaut/Pages/default.aspx

[4] Real Yields vs. Yield Curve Slope from Calafia Beach Pundit Interest rates are rising because the economy is strengthening http://scottgrannis.blogspot.com/2018/10/interest-rates-are-rising-because.html

[5] Both Confidence charts from Calafia Beach Pundit An emerging and important secular trend  http://scottgrannis.blogspot.com/2018/09/an-emerging-and-important-secular-trend.html

[6] New Home Sales from Calculated Risk Investment and Recessions 10/10/18 https://www.calculatedriskblog.com/

Opinions expressed in the attached article are those of Don Harrison, Scott Grannis and Bill McBride and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Links are being provided for information purposes only. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.
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