Last week, we saw the market swing wildly after the highest core consumer price index number in four decades was reported.

The S&P 500 plunged lower before rebounding for a 2.6% gain Thursday. Traders anticipate the Fed will have to be even more aggressive in hiking interest rates to tamp down the risk of inflation, but the stock market may have found a bottom.

In our livestreams late last week and on Monday, we examined the latest reports, predictions on how the Fed will react, and how it all affects the market and our portfolios.

Bad News Is Good News for Markets

We examined the core Consumer Price Index data in our Thursday livestream. Unfortunately, CPI core data – a measure of inflation that excludes food and energy costs – has been driving market numbers throughout the year. The index hit its highest point in 40 years this month.

That may sound dire, but the overall CPI came in at 8.2%, down an entire percentage point since July. As we’ve emphasized over the past few weeks, there is a lot of this kind of bad news – but for every negative report, there are positive ones and strong fundamentals, like solid employment and earnings reports, that can drive market rallies.

A Sea Change in Expectations

The latest ADP National Employment Report, released last week, provided more good news about jobs. In September, 208,000 more jobs were created, up from 185,000 in August.

That report contributed to an adjustment of Wall Street’s expectations. We were seeing confidence that the Fed would raise rates by 50 basis points in November and December, but now we see a 71% chance that the Fed will increase rates 75 basis points for the rest of 2022, bringing it to about 4.75% by the end of the year to mitigate inflation effects.

Macroeconomic issues weighing on the economy are unavoidable and serious, however, and because of that, forecasters at Bloomberg have changed their 65% prediction to 100% that a recession is likely by the end of 2023.

But it’s not time to panic quite yet; it’s just one economic model among many… but its effects are being felt. On CNBC’s Squawk Box today, Goldman Sachs (GS) CEO David Solomon said…

I think you have to expect that there’s more volatility on the horizon now. That doesn’t mean for sure that we have a really difficult economic scenario. But on the distribution of outcomes, there’s a good chance that we have a recession in the United States.

He spoke on the heels of Goldman Sachs releasing its better-than-expected third-quarter earnings report that topped analysts’ expectations for profit and revenue.

Looking Forward to Earnings Reports

Headlines in the coming week or two will be dominated by earnings reports.

The ones we’re looking at right now are bank reports, which have been better than expected, and in fact, helped the S&P 500 jump up off support. We’ll have to wait to see if this bounce will hold, or if traders should watch resistance to send prices back down this week.

The divergence between a strong labor market and consumer spending vs. other weak fundamentals, such as inflation, manufacturing, and shipping makes this market a tricky one to trade, but there are still profits to be made.

In last night’s livestream, we discussed Bank of America Corp. (BAC)‘s earnings. BAC beat expectations, though expectations are considerably lower than they should be. Banks have to instill loan-loss reserves, and if loans go unpaid, then banks must use those reserves to cover them. If those reserves aren’t needed, then they can be reported as income later and boost earnings, which is what we expect.

BAC reported that credit card spending is up 13%, which investors tend to frown upon because it is considered consumer debt. However, those charges were not covering budget shortfalls, which would indicate financial pressures; it was spent on travel and leisure and other discretionary charges. In fact, loan delinquencies are the second lowest ever because the labor market is still hot.

Our Portfolio: Siding with Stability

You may have noticed that our outlook has been fairly nonbinary, and that’s where we still are, sentiment-wise. We don’t view the markets as being completely bullish or completely bearish. We’re weighing the negative reports and the favorable ones to help traders make the most optimal decisions for their portfolios. In these scenarios, we like to deploy plans with a positive outlook, while hedging as much risk as possible.

In the midst of this bearish market, there are still profit-making moves to be made. We remain bullish on consumer defensive stocks like Costco Wholesale Corp. (COST), Walmart Inc. (WMT), Target Corp. (TGT), and auto parts resellers like Advance Auto Parts Inc. (AAP).

We’re also scouting good deals in growth large-cap tech, but there is always volatility in that sector. We hold a few Microsoft Corp. (MSFT) has good fundamentals and is relatively cheap right now. You may be in for a rocky ride with Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Alphabet Inc. (GOOG), and the other FAANG stocks, but right now, they are heavily discounted.

You’ll find a few of these stocks in our Strategic Trader portfolio among many others. The best gains can be made in down markets like the one we’re experiencing, and we’re here to guide traders every step of the way. With Strategic Trader, you can turn volatility in the options market to YOUR advantage. Take control of your portfolio.

The best stocks are those that are most insulated from the problems in the economy. They are positioned to take advantage of the economy’s problems, namely inflation, rising interest rates, and slowing growth. We’re keeping that in mind as we keep an eye out for opportunities… and risks.

Sincerely,

John and Wade