(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).
I am betting a few of my beloved Reitmeister Total Return (RTR) members thought I was crazy on Friday doubting the ferocity and longevity of the nearly 3% bounce that unfolded the previous couple sessions. Yet, for the several reasons I will share again below, I just saw a bit more turmoil ahead as part of the markets digestion period.
“Am I going to change my tune about the short term outlook for more downside and volatility?
No.
Here is the parade of reasons that I think the pullback is not yet over.
First, the market needs one of those good deep cleanings every 6-12 months. The last time was before the election in September and October. So we are about in that range of time where it makes sense.
Second, there is often a sell off that comes around tax season. That typically is in mid April. But remember that got pushed out this year til May 15th.
Third, inflation is the root cause of many recessions and bear markets. So it is one of those buzzwords that often causes fear when it hits the headlines. Then we push on higher when investors are reminded that inflation is truly not hot enough to derail the economy YET.
But interestingly, the Consumer Sentiment reading today plummeted from 90.4 to 82.8 because of a massive increase in consumer concerns about inflation. That is certainly showing up at the gas pump where folks notice it first. So I think this story will linger in the news longer and hamper investor near term outlook.
Fourth, is the seasonal idea of “Sell in May and Go Away”. No it’s not always a bad time for investors. But if it starts off bad, like it is now, then it can be a self-reinforcing idea that has some investors move to the sidelines.
Fifth, I have been running investment websites since 1999. And I can tell you without fail that website traffic is a concurrent indicator of investor sentiment. Well as it turns out week over week traffic is down about 30%. Not just StockNews.com, but many of my competitors.
This is a sign of losing interest which is often short term negative. Sure, some of that is the coronavirus receding. And some it is the weather getting better and less need to have your face stuck in a computer. But a 30% drop week over week is exceptionally bad and not quickly rectified.
Let’s draw the line there why I don’t feel bad moving a little money to cash even though today I am looking like quite the investment clown ;-)
On the other hand, don’t let this short term picture divert you from the long term picture that we are still in the midst of a long term bull market. And that bull can run higher whenever it darn well pleases. In fact, that often happens when you LEAST expect it.
That is why I only have a modest 14% in cash because it is foolish to distance yourself too much from the long term trends. So again, this is just a little short term timing move made for the reasons noted above and will change it out if it proves to be an unfounded notion.”
(End of last Friday’s commentary and back to today’s fresh insights...)
The Consumer Sentiment report was truly one of very few negative economic reports in a long time. All the others are also about signs of rising inflation like the +6.2% year over year inflation tally for PPI last Thursday.
Yes, that sounds SHOCKINGLY high. But let’s remind ourselves the picture from one year ago in mid May 2020. The economy was in downright freefall due to the “live under a rock world” thanks to the Coronavirus. That is most certainly a deflationary environment. Like gasoline plummeting under $2 per gallon across the country. Now we are a good 60-70% higher.
That was an unnatural and temporary set of circumstances that is having most economists talk about most of the current inflation as being transitory. As in temporary and not persistent. Because if investors though 6% inflation was real, then the 10 year Treasury would be well above 1.6% as it is now and likely north of 4%.
Don’t get me wrong. There is more inflation in the economy. And rates will be going higher. But indeed 6% inflation is an aberration.
What is the real long term inflation rate?
Great question. Investors will be searching high and low for the answer in the months ahead. I suspect it is above 2%, but below 3%. That is a plenty fine environment to foster stock price advances which is why that when this digestion period is over the bull market will be back on track.
At this stage I still expect stocks to take a shot down around 4,000 to shake out recent excesses. And maybe all the way down to the 100 day moving average currently at 3,946. This will make for very buyable dips for the likely run up to 4,500+ by years end. So get ready to act when the time comes.
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Steve Reitmeister
…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares were trading at $410.07 per share on Wednesday afternoon, down $1.87 (-0.45%). Year-to-date, SPY has gained 10.04%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
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