Mind Your Ps and Es

Stocks slide... earnings stumble... and the whole house begins to wobble...

(Source: Getty Images)

Joel Bowman, checking in today from Buenos Aires, Argentina...

Whether by day... week... month... quarter... or year-to-date...

... however you choose to measure the stock market’s performance in 2022, you’re likely looking at a red screen. 

The Dow Jones Industrial Average slid 500 points into Friday’s close to end the month down 8%, the worst September since 2008. It’s down 21.5% year to date.

For the S&P 500, it was the worst September in twenty years (going back to 2002). It’s off 25.3% so far this year. 

As for the Nasdaq, the tech-heavy index finished the month down 10%. One third of the Nasdaq’s value has now been wiped out. Its year-to-date performance is... one to forget. 

Like a surfer tossed from his board, investors thrash around in the market turbulence, searching for a solid bottom to “push off.” How much further down will he have to swim? How much more punishment can he endure? How much more air does he have?

We’ll find out...

But remember, we’re only at the Price decline stage. Earnings may be still to come, as Bill reminded us a couple of weeks back:

First, the P gives way. Then the E. Stock Prices are supposed to ‘look ahead,’ anticipating future Earnings. So, in the initial stages, prices drop before the bad recession-era earnings become apparent. Then, the lower prices mislead investors. They think stocks look ‘fairly priced.’ Advisers urge them to ‘buy the dip.’  

At current prices, for example, Alphabet almost looks like a value stock.  

But then comes more bad news. The recession causes sales and earnings to fall. Soon, it doesn’t look like such a bargain anymore.

And lo, barely a week after Bill penned the above words, we see indications that the not-so-easy Es may be about to fall in line behind the plummeting Ps. A handful of headlines gives the flavor... 

CNBC:

Third quarter earnings are now on pace to grow at the slowest rate in two years

MarketWatch:

Micron earnings suggest the chip downturn could be worse than Wall Street expects

Fox Business:

Cruise stocks sink as Carnival misses Wall Street earnings expectations, warns of Q4 loss

Yahoo!Finance:

CarMax’s Big Profit Miss Sends Warning Signal on US Consumer

Barron’s:

Nike stock is getting crushed. Why earnings are disappointing investors.

Of course, earnings do not simply rain down from the heavens (at least not in the private sector). Instead, they come from customers... customers who are not only willing to consume goods and services, but who are also able to do so.

Where does the average American, many of whom are working two jobs just to make ends meet, get the spare cash to buy a pair of Air Jordan kicks... a new set of wheels... or to set sail on a grand Carnival cruise? 

Thanks to his Federal Reserve, that deft steward of his currency, our working man’s hard-earned money is losing value at a rate of more than 8% per year (officially); a phenomenon that appears stubbornly non-transitory in nature. The Commerce Department reported on Friday that the Core Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred measure of inflation (which strips out the impacts of food and energy), rose 0.6% in August.

Moreover, as noted earlier in the week, the pillar of American middle class wealth – the housing market – is also starting to wobble. The Case-Shiller Home Price Index registered its steepest month-over-month decline ever during July. Rising rates are already pushing “affordability” beyond the means of many. 

First go prices… then follow earnings… then, investors lose the whole house…

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Meanwhile, here’s BPR’s Investment Director, Tom Dyson, hammering home a point he’s been writing about (and right about!) all year…

The dollar is like a loose cannon on the deck of a ship, smashing everything to bits. We’ve now seen interventions in Japan, China, Korea and Taiwan. Britain was the latest to intervene. 

Last week I wrote, ‘Dysfunction and illiquidity in bond markets is exactly what I’d expect to see in the beginning stages of a financial crisis. This is something we must watch closely.’

I hope I haven’t minced my words or been unclear about how I see things unfolding. As long as the Fed continues its rate-hiking cycle, the risks of some kind of market accident or financial crisis will remain very high, as high as I’ve ever seen them. 

Remember, in a bull market, the market does its best to keep the public out of stocks and on the sidelines. And in a bear market, the market does its best to trap as much capital and then destroy it. Rallies are traps. Avoid them.

My view remains the same. We’re in a bear market. Set the dial to maximum safety. Hold lots of physical gold and cash.

Cash hedges you against nominal price declines. Gold hedges you against currency depreciation. It’s essential you hold both. We currently suggest an allocation of 35% cash, 35% gold and other durables, and 30% cheap value stocks. 

Our guess is, the only people who aren’t growing tired of reading about “Maximum Safety Mode” are those who heeded Tom’s advice early on and avoided a lot of the subsequent carnage. If you’re not already in Maximum Safety Mode… you may wish to engage it today. Find out exactly how, here...

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And now for Bill Bonner’s missives from the past week...

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And that’ll do for another Weekend Market Wrap, dear reader. We’ll be back tomorrow with a handful of exclusive videos and more Fatal Conceits than you can shake a stick at.

Until then...

Cheers,

Joel Bowman