Stop Selling This, and Start Buying That

Stop Selling This, and Start Buying That

According to an old expression, “It is better to travel hopefully than to arrive.”

Wall Street has a similar saying: “Buy the rumor; sell the fact.”

Both expressions convey the idea that the journey is often more delightful than the destination itself.

On Wall Street, for example, stocks often perform best before good news becomes a well-known fact. Once the good news actually arrives, the most profitable part of the journey is usually over.

But the opposite tendency is also true. The stock market prices in bad news before it happens, then rallies once that news becomes fact.

I believe we have drawn close to that critical inflection point – the moment when we investors should stop selling the rumor… and begin buying the fact.


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One of the Latest Rumors Investors Sold

For months, investors have been selling the related rumors that stubbornly high inflation would cause the Fed to hike short-term interest rates until the economy slips into recession.

But with the Federal Reserve’s aggressive rate hike and Chairman Powell’s equally aggressive posturing about future rate hikes, these rumors are rumors no more. They are facts…

  1. Inflation is still grabbing headlines.
  2. The Fed will be raising rates well into next year.
  3. The economy is slowing.

Because investors have spent the better part of a year selling these rumors, the S&P 500 Index has slumped 22%, and the Nasdaq has tumbled 31%. In other words, the stock market has amply discounted the bad news.

Although the collective investor psyche may not have reached what legendary investor Sir John Templeton called “the point of maximum pessimism,” very few investors are wearing rose-colored glasses and looking for rainbows and unicorns.

Pessimism and anxiety are widespread and based on rumor. For example, stocks fell last week on the latest University of Michigan Consumer Sentiment survey, in which consumers say they expect higher inflation 12 months from now than what we have today.

First of all, that shouldn’t be a surprise, and secondly, is definitely “rumor.” Nobody knows where inflation will be a year from now. Consumers, the Fed, economists, and everybody else has been wrong for nearly a year now. Why would we expect them to be right next year?

I was so intrigued that a one-year guess could move stocks that I went back to see just how good – or bad – an indicator consumer inflation expectations are. The conclusion: not very good.

All we need to do is look at last month. One year ago, in September of 2021, consumers expected inflation in September 2022 to be 4.6%. Actual inflation? 8.2%.

It’s been the same story for the last 12 months. Consumer expectations for inflation for one year out averaged 3.5%. But the actual inflation averaged 7.7% – or more than double the guesses consumers made. I went back all the way to 1977 in my research, but here’s a screenshot of the spreadsheet I put together of recent data showing how far off consumer inflation expectations have been.

A screenshot of an Excel sheet that shows the Michigan guess and date versus the actual CPI number.

That survey question – whether you expect prices to move higher over the next 12 months – tells us much more about current feelings than provide any real insight into 2023.

And what are those current feelings? Investors have become so accustomed to downbeat news that they are unprepared for the good.

But that’s exactly what could be coming our way soon… or at least less-bad news.

This May End Faster Than You Think

I expect the upcoming inflation readings to decline faster than most folks currently expect. As a result, I expect the Fed to hike rates less aggressively next year than most folks currently expect.

Because inflation progresses through the economy like a mouse through the belly of boa constrictor, the Consumer Price Index (CPI) inflation reading is a lagging indicator. It captures and reports inflationary effects months after they enter the economy.

That’s why recent CPI readings have been so miserable. But it’s also why the upcoming CPI readings might not be. Several inflationary factors have been moderating for months. The chart below tells part of the tale.

A chart showing how both the Baltic Freight Index and the Fed’s Global Supply Chain Pressure Index soared late last year, then proceeded to tumble this year.

The Baltic Freight Index, which measures shipping rates to transport dry goods, topped out a year ago and has dropped 70% since then.

Similarly, the New York Fed’s Global Supply Chain Pressure Index peaked last December and has tumbled 65% since then.

The commodity markets are telling the same story. Commodity prices, as measured by the Refinitiv/CoreCommodity CRB Index, have slipped 15% the past three months.

As these deflationary trends work their way through the economy, the monthly CPI readings should decline, perhaps sharply.

Higher Rates Historically Mean Higher Stock Prices

Lastly, contrary to popular belief, the stock market can rally during periods of rising interest rates. In fact, historically, that has happened more often than not.

Why? Because the stock market often “travels hopefully.” Rather than fixating on rising rates, it “looks ahead” to the end of a rising-rate cycle.

During the past 45 years, the Fed has conducted eight major rate-hike campaigns (excluding the current one). During each one of those campaigns, the stock market rallied.

Not a single loser in the bunch. The table below provides the details.

A chart that shows the S&P 500’s total gains during each of the previous eight rate-hike cycles.

During the current the rate-hike cycle, the stock market has fallen 17%… so far. But before this cycle ends, I expect history to repeat itself.

In other words, I expect the stock market to post a strongly positive return between today and the end of the current rate-hike cycle. Perhaps stocks will waffle for a while longer, but I believe the time has come to stop selling the rumor… and start buying the fact.

To be sure, investing during a deep bear market is a messy, chaotic, and nerve-racking endeavor. But these gut-wrenching moments are the ones that provide outstanding gains…

That’s why I am very selective right now in the stocks I recommend to my Investment Report readers. My two newest recommendations trade at a discounted valuation of less than six times earnings. From these low valuations and with solid demand for their products, both stocks offer substantial upside potential over the next few months and years

1,000% gainers take root in these kinds of markets, even though they might take their sweet time germinating and blossoming.

Regards,

Eric

P.S. To learn how to get access to my newest recommendations – including plays on energy, cybersecurity, and more – click here.

On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, here.


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