Weekly Chart Review

The Recession Has Begun...

I was on vacation last Wednesday through Sunday (hence the delayed delivery of this week’s newsletter).

So what did I miss?

What a few days in the market!

Just to recap…and I’m sure I missed something.

• The FOMC doesn’t cut rates (as expected) and the market is upset they are behind the curve and now calling for a 50 basis point cut in September (if not sooner).

• The Jobs Report comes in worse than expected.

• The Unemployment Rate comes in at 4.3% thus triggering the Sahm Rule.

• We learn that Warren Buffett has dramatically reduced his Apple holdings and now sitting on a quarter-trillion in cash.

• The Japanese Yen carry trade is collapsing.

• The Nikkei falls -12.4% in one day.

• The VIX trades to 65 today (note: the last two times it traded above 60: 1) Covid, and 2) the Great Financial Crisis).

• The UST 2 vs. 10 briefly un-inverts.

I will ask again…what did I miss?

I could write an entire newsletter on each of these topics but given the already delayed nature of this week’s report, I will simply say, it’s time to buckle up.

The triggering of the Sahm Rule, and the possibility of the UST 2 vs. 10 curve moving to an un-inverted state, suggest that the US is now in a recession.

You are going to hear all the reasons why “this time is different” but I assure it is not.

With that said, you shouldn’t expect the market to fall by 20%, 30%, or 40% in the next few days/weeks, it’s always a process and the market never moves in a straight line.

However, you should begin by asking yourself, or your financial advisor, what your plan is for the recession and I would suggest this applies to all aspects of your life.

Proper planning now will likely setup the buying opportunity of a generation (look at what Buffett is doing).

If nothing else, take a quick spin through the “Asset Class Review” below and focus on the what did well last week in the midst an extremely volatile period.

Regular readers know that I provide my S&P 500 “fair value” model results at the end of the newsletter each week. Now is more important than ever to understand what this model is telling us.

Very simply, it suggests that the S&P 500 “needs” to decline by -51.8% to get to fair value.

Could the market fall more or less than that, absolutely. It will likely depend on the speed of the decline.

If the decline is “orderly”, we could see the S&P 500 bottom out somewhere below the fair value line like we did in 2002 and 2008.

If the decline is more rapid, we could see a muted decline (relative to the fair value line) like we did in 2018 and 2020. The key is the speed.

Fortunately, our model also tells us when it is time to get back in the game. Historically, major market declines have ended when the Z-Score for the model falls to somewhere between -3.0 and -4.0 (Note: the Z-Score is currently at +1.99).

Here is the model. Recall, the current fair value for the S&P 500 is 2,576.24.

Asset Class Review

Each week we take a spin through the major asset classes in an attempt to discern a) what has changed, b) how markets are tilted (i.e., “Bullish” or “Bearish”), and c) where markets may be extended (either positively or negatively) which may provide an opportunity to either enter or exit a position.

We do this by looking at three different time periods: Daily (Short-Term), Weekly (Medium-Term), and Monthly (Long-Term). Additionally, we analyze the applicable Z-Scores to get a sense of overbought or oversold conditions.