Is this the formation of a bear market?

The S&P 500 (SPY) has rallyed impressively since its low of 3,810 on May 20. Unfortunately, the more I look at the facts, the more concerned I am that this is the formation of a bear market, the more defensive measures I take in my newsletter services, Reitmeister Total Return and this one, POWR Value. In this week’s Market Commentary, I go into more detail about why the probability of a bear market continues to grow. Read on below for more….

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(Enjoy this updated version of my weekly commentary, published June 3, 2022 of the POWR Value newsletter).

In last week’s POWR Value commentary, I shared more insights that equated to a higher probability of a bear market on the horizon (read it here).

Since then, the preponderance of new evidence points in that negative direction as well. This means that the bear market “thought virus” continues to spread.

Most notable is the Atlanta Fed’s updated GDP Now reading. A few weeks ago I used the same indicator here as evidence of economic strength at +2.5% for the second quarter.

That has now fallen to just +1.3% after the most recent economic results came in below expectations. That is directionally bad news.

Yes, some will point out that ISM Manufacturing rose from 55.4 to 56.1 on Wednesday as a positive. Or that government employment showed 390K job gains today, which was higher than expected.

However, let’s keep in mind that Production often runs on a dime and a solid month tells us little about what happens next. Or the fact that ISM Services came in lower than expected today at 54.5 from 55.9 last month.

In addition, the service sector is 4x larger than manufacturing.

As for the seemingly good employment numbers… the sad truth is that employment is a lagging indicator. This means that it often doesn’t properly indicate problems after a recession has taken root.

A kind of fire alarm that only goes off after the building has burned to the ground.

Also interestingly, Thursday’s competitive ADP employment report was woefully below expectations with only 128K jobs added. That’s the slowest pace since the onset of Covid.

In addition, historically, it was much more accurate in displaying job trends than the government version.

Moving beyond economic data is more evidence that the bearish thought virus is spreading to more places. Here’s a list of the most telling negative headlines that prove that point:

Here’s the email Elon Mush sent to all Tesla employees about a 10% workforce reduction

Jamie Dimon (JPMorgan Chase CEO) Says “Brace Yourself” For An Economic Hurricane

You have been warned

Yes, I could go on and on. And if in doubt, search Google for terms like Bear Market or Job Layoffs and see how much comes out to support this negative idea.

Right now I would say the probability of a recession and bear market is north of 50%. That also means it’s not a foregone conclusion.

That the Fed could indeed orchestrate a soft landing for the economy if they raise interest rates and that the recent nasty correction hurt enough before a return to bull market conditions.

Our decline to 69% long in POWR Value is a nod in that direction. That a bear market is indeed not a given, and this more conservative stance gives us a better balancing act to become more defensive or aggressive when necessary.

This means that if a bear market is on the way, we will likely sell more of our aggressive positions and rotate to larger conservative positions with a lower beta in the portfolio. Also probably lower the total long exposure to just 50%.

On the other hand, if we avoid bear market territory and make another serious and prolonged bull run, we will do the opposite.

That would mean getting back to 100% long in more aggressive positions. That includes a higher dose of small caps, growth stocks and higher beta investments.

Remember that economics is a soft science. This means that it is not exact, making it difficult to make concrete predictions.

The same is, of course, true for the stock market by expansion, as recessions and bear markets go hand in hand.

I point to this to appreciate the step-by-step approach we use to get more or less bullish in our portfolio.

That’s because it’s very dangerous to guess wrong and get trampled by the market going the other way. Better to make more nuanced moves as things unfold.

What to do?

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All the best!

Steve Reitmeister
CEO StockNews.com & editor of POWR Value trading service

SPY shares closed at $410.54 on Friday, down $-6.85 (-1.64%). Year-to-date, the SPY is down -13.29%, versus a % increase in the benchmark S&P 500 index over the same period.


About the author: Steve Reitmeister


Steve is better known to the StockNews public as “Reity”. Not only is he the CEO of the company, 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 selection.

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