3 Signs The Bottom Is For Stocks
The current bear market is brutal.
It’s down, down, down.
And when there is a rally, it’s usually erased in a couple of days or weeks.
The reason is because the underlying fundamental economy is particularly scary for one main reason.
It’s all completely voluntary.
That’s what has investors rightly scared and on the sidelines.
But rest assured, it will change.
Eventually.
And when it does, you’ll want to be on board for the economic boom that follows.
Because once you understand why extra caution is warranted now, you’ll know what to look for to know the turnaround is here.
A Recession By Choice
The foundation of the current bear market is a perfect storm of economic problems.
The combination of inflation and rising rates has put the economy on a slow and steady path of decline.
There hasn’t been something like this in the U.S. in decades.
You have to go back to the last truly long and pounding recession of the early 1980s.
That recession was far worse than where we’re currently at.
Inflation, interest rates, and unemployment were all double-digits.
But the key is it wasn’t a voluntary recession.
While the recession was underway, the Reagan administration was simultaneously unleashing the American energy industry which is the foundation for broad economic growth and recovery.
Cheap, abundant energy can make a lot of people much wealthier much more quickly.
Today it’s the exact opposite.
That’s a problem.
But what will truly keep investors on the sidelines is there’s no sign of any serious change to this policy.
All we hear is scapegoats and blame.
That’s why investors are right to be scared and fear for the worse.
But it will change eventually.
Here’s what we’re looking for to see the big change and jump into stocks in a big way.
Recipe For New Bull Market
Three economic indicators that must change to power a new bull market.
If one or two of them hit, things could get really good, really fast.
If all three turn, watch out, there’s fortunes ahead for investors who survive the current downturn.
Here are the three economic indicators to watch:
#1: Interest Rates
Jonathan Clements at thehumbledollar.com astutely observed recently in an article titled Back To Fundamentals:
The story of the financial markets over the past four decades can be told with two data points.
In September 1981, the yield on the 10-year Treasury note almost reached 16%.
In August 2020, it got as low as 0.52%.
That was a bull market in bonds that powered the entire everything-bubble that’s unwinding right now. .
The low rates buoyed every investment - especially real estate and stocks.
The cost of borrowing money was low, companies accelerated capital investment, investors paid top dollar for real estate, and investors looking for the biggest returns found it stocks.
That all changed in 2022 and you are living the after-effects.
The yield on the 10 Year U.S. Treasury bond has rebounded to 4% and it's upending every market around the globe.
Public companies are being completely revalued.
Real estate is getting revalued as well.
It’s going to happen to everything because valuations must be low enough to generate higher returns than 4%.
That was easy to beat when 10-Year U.S. Treasury bonds were less than1%.
At 4%, it’s a much different story.
Rates will turn eventually and from there the wind will be back at asset valuations again.
Until then though, it’s going to be running up hill.
#2 Energy Production
We talk a lot about energy here because energy is everything.
Energy is wealth.
Cheap energy equals a high standard of living.
Transport. Goods and services. Food. Capital. Housing. Everything is cheaper when energy is cheaper.
That’s why the most important chart in all of the world today is this U.S. oil production chart from the Energy Information Administration:
This should be prime time for U.S. oil production.
However, it’s being choked off and despite $100 oil and consistently high demand, domestic oil production is still 10% lower than it was three years ago.
It’s not inexplicable.
A choice has been made.
But if enough political will comes along to reverse that choice, more and cheaper energy will be a major tailwind for the economy and stocks across the board.
#3 Inflation Downtrend
Finally, inflation.
Inflation is one of the most destructive economic and societal forces ever created.
It destroys the many savings of millions of people and rewards the few major borrowers.
It prevents capital accumulation and deployment which increases the wealth of the world.
It’s bad in every way.
And it can’t go away fast enough.
But here’s the thing that matters most for regular investors.
Inflation doesn’t have to disappear.
It will likely take years to get back to the old days of 2%-3% official inflation rates.
Inflation will have to peak and appear under control.
Just knowing that we’re on the path will allow investors to get interested in stocks once again.
Watch for the top, because it could coincide with a bottom in stocks.
More Pain, More Gain
Right now there’s no obvious or immediate turnaround in any of these factors.
That will likely keep the downtrend intact and keep a lid on any rallies.
Yes, there will be rallies along the way.
But without any major structural changes, you’ll know they won’t last.
In the end, these are the three indicators behind everything.
If only one or two of these indicators change, the bleed out in stocks is over.
If all three come in, well, it’s game on again. The recovery will be a monster.
Be prepared now so your ready to move when it’s time.
