Today’s GDP release showed that the economy has contracted by 1.4%.

This now puts a number on the stock market’s relentless descent.

But despite the ugly price action in stocks lately – and the concerned scowls from the talking heads earlier this morning – I’m much less bearish and more optimistic about the opportunities I’m seeing.

For Market Minute readers, this major slowdown in the economy should come as no surprise.

We saw this coming on February 8, when we pointed to the divergence in this year’s commodities melt-up – and falling inflation expectations in the fixed income market – as a sign that something was brewing:

“A recession is defined as a slowdown of the economy (measured by the GDP) two quarters in a row.

And because recessions are usually deflationary – meaning demand slows down and prices simmer down – inflation expectations follow suit sometimes well in advance. As long as the stock market stays down and rate hike expectations stay up, you’ll probably see mainstream headlines catch up as they start preparing everyone for this very real possibility.”

Those headlines are now starting to come in en masse.

You should even expect to see more, especially once pundits cross the line from economic analysis into hyperventilation.

Earlier this week, I also stated that the market has a forward-looking mechanism that quickly discounts a lot of bad news.

This explains why the market still rose today – making up for all the lost ground from Tuesday’s melt-down – despite the bad news.

It’s the same reason Meta Platforms’ (FB) horrendous earnings report still wound up being bought – rising almost 20%.    

Its name change was a great indicator that the stock was about to blow. A company won’t change its name unless there’s panic in the boardroom.

But FB makes money… a lot of it.

And when earnings for a big tech name like FB are priced at a 15.5 P/E, it’s usually a good deal.

And this is exactly where FB stood at 4 p.m. before its earnings release.

This goes back to the point I made in Tuesday’s essay. Valuations have already come down to reflect all the bad news – and have become reasonable on a broad scale.

By reasonable, I mean they are at a long-run average.

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Although S&P 500 valuations look more reasonable, it doesn’t mean we’re going straight up.

We are in a tough economic environment… reminiscent of the slow growth and high inflation from the 1970s.

From 1970 to 1977, the S&P 500 was essentially flat – rising an anemic 3%. But it had some massive up and down moves in between.

If Pivoting Powell – a nickname I use for the head of the Federal Reserve – is successful in planning a soft landing and crushing inflation back to its long-run average, then we will probably see a broad based melt-up in the market.  

But right now, the fact that valuations have come down to their long-run average simply means we have entered a stock picker’s market.

A stock picker’s market is one where fundamentals play a bigger role than broad-based, momentum. Not everything will rise and fall together… Not everything will go strictly up either.

But it’s starting to look like the worst is behind us.

We will probably see a continued meat-grinder on the index level – up 5% and down 5% on a regular basis.

But certain sectors and individual stocks will trend well and present good opportunities at the right price.

Investors should keep this mindset in place before pulling the trigger on future buys.

We don’t have to overpay when everything is on sale.


Eric Shamilov
Analyst, Market Minute

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