Beware Bear Market Rallies
Stocks have been flirting with a full-fledged bear market, with sell-offs that are quickly counterbalanced by short-lived rebounds. Amid this up-and-down action, can you trust the mini-rallies?
Any rebound at this point could constitute a “bear market trap.” That’s an occurrence whereby stocks that have been sharply falling seem to be reversing their fall, but are only pausing before they resume heading south.
Bear market traps happen when excessively optimistic investors misinterpret or ignore bearish indicators.
On Monday, we got another rally. The main U.S. stock indices soared as follows: the Dow Jones Industrial Average +1.98%; the S&P 500 +1.86%; the NASDAQ +1.59%; and the Russell 2000 +1.10%.
In pre-market futures contracts Tuesday, stocks were trading in the red. And so it goes…rally followed by downturn, followed by rally. The headlines about war and inflation suggest that the roller-coaster ride probably won’t end anytime soon.
Monday’s rebound came in the wake of seven straight weeks of grueling losses. The tech-heavy NASDAQ still occupies bear market territory, mostly on fears of rising interest rates.
The U.S. 10-year Treasury yield has been edging higher and currently hovers at 2.81%, but still significantly below recent highs of 3.20%. Energy prices remain elevated and continue to fuel inflation.
The ghosts of Smoot-Hawley…
The Biden administration announced on Monday that it would consider lifting tariffs on China that had been imposed by the Trump regime. Such a move is designed to fight inflation. Asian equities have responded well to the news. About two-thirds of Chinese imports to the U.S. are burdened with 25% tariffs.
The vast majority of economists decry tariffs as dangerous. Of course, you’ll find a few pseudo-economists on CNBC who’ll defend tariffs. But economic experts who actually know what they’re talking about condemn protectionism. They say tariffs raise the cost of goods, reduce output, destroy jobs, and exacerbate geopolitical tensions.
History proves their case. The Smoot-Hawley Tariff Act of 1930 sparked a ruinous global trade war that sank the world deeper into a depression that lasted 10 years.
A headwind that can’t be eliminated as easily as tariffs is continued disorder in the global supply chain. Indeed, tariffs make supply chain problems worse. Research firm FactSet searched for key words or phrases to find the term “supply chain” in the conference call transcripts of all S&P 500 companies that conducted earnings conference calls from March 15 through May 19.
Among these companies, 338 cited the term supply chain during their earnings calls for the first quarter, which is well above the five-year average of 199. This is the third highest number of S&P 500 companies citing supply chain on earnings calls since at least 2010 (see chart).
The materials (93%) and industrials (91%) sectors have the highest percentages of companies that cited “supply chain” on their Q1 earnings calls during this period.
Walmart (NYSE: WMT) stunned Wall Street with its quarterly earnings miss. Management noted during its May 17 earnings call: “The first quarter was one of the most challenging periods yet related to supply chain disruptions, increased costs, and persistently high inflation.”
Behold, the new consumer staple…
To cope with the investment risks I’ve just described, you should increase your portfolio’s exposure to companies that provide “the essentials.”
It’s an investment truism: invest in products that people will always want, in good times or bad. And when it comes to providing a product that people crave the world over, marijuana passes the test.
During recessions, so-called sin stocks (alcohol, tobacco, etc.) tend to outperform. Add recreational cannabis to the list. Meanwhile, the need for new health treatments will persist despite the economic cycle, buoying medical marijuana stocks.
That’s why I urge you to read my new book: The Wide World of Weed and Psychedelics. It’s your definitive guide for making money in the thriving cannabis and psychedelics industries. Click here to get your free copy.
John Persinos is the editorial director of Investing Daily.