The Macro Market Wrap Up With The Mad Genius, Vol. 39

My last post, Volume 38, was my bond forecast for 2019, and regarding the stockmarket, even though the last 2 weeks have been positive, we’re not out of the woods yet. In fact we’re still on the way in and we haven’t even gotten started yet.

My stock forecast will have similar causes and outcomes to what I said about bonds. Which are prior and potential future rate hikes bearing down on equities because the price you pay for equities represents your expectations for future profits. As a reminder, my base case is that as rates rise, that will take away cash flow from the companies you’ve bought as well as your own wallets. Less cash to spend for you means less cash going to companies like Apple, Netflix, and others. In addition to you spending less, those companies will spend more on servicing their debt load. It’s a double whammy that will cut into gross revenues and more importantly net profits.

It is also my opinion that October 2018 was just the beginning of stock market weakness, and the current strength we are seeing over the last 2 weeks is renewed confidence based on the perception of what will happen at the Fed as well as the perception of positive progress on trade talks with China. We can see in the charts that current resistance is at about 2810 on the S&P500 so I don’t expect stocks to move assertively above that before heading back down.

But the stock market traders have it all wrong. It’s actually pretty well known on Wall Street that equity traders are usually wrong about these kinds of macro economic signals, whereas bond traders have it right. And that is true here as well; trade talks will prove less beneficial than we think or want, and even though the bond market is not onto it yet, the Fed has already pricked the bond and stock bubbles.

Remember that stocks are overvalued by every measure known to man, by anywhere from 50–200%. That means that in order for stock valuations to revert back to the mean, we should see a fall of 50% or more. If earnings also fall as I expect and as some on the Street now expect, stocks will fall even further. And remember that the typical scenario is stocks always overshoot…both on the way up and on the way back down.

On the way down I expect to see the S&P fall below 1000 for a total loss of at least 67%. And because 1) earnings will also fall precipitously and 2) we can expect stocks to overshoot to the downside, we may see stocks fall all the way to prior support levels around 800. It’s not unheard of for equities to lose 70–90% of their price. It has happened several times right here in America, so don’t think this time is different.

It’s not all bad news though, because there will be sectors that will perform relatively well for what is coming. It’s the sectors that typically do well, which are utilities, consumer staples, health care, and discount retailers. Everyone has to keep the light and heat on, everyone has certain common items they can’t live without like bread and soap, everyone needs bandaids and bacitracin, and everyone will be looking to the big-box and warehouse club stores to buy stuff at steeply discounted prices. These sectors typically pay out handsome distributions during recessions, adding to the value they hold for investors.

That’s it for today. Let me know what you think or ask your questions in the comments below. Thanks for reading Volume 39 of The Macro Market Wrap Up With The Mad Genius. Until next time remember that there is always a bull market somewhere in the world, and on the opposite side of every crisis, lies opportunity.

#economics #investing #stockmarket #bearmarket #recession #forecast2019