Presents our

Bi-Monthly

 ERPE Excerpts

John J. Gardner, CFP®, CPM®

blackhawkwealthadvisors.com

Bi-MONTHLY MARKET ANALYSIS &

ECONOMIC UPDATES

June 20, 2024

How are You Prepared for

The Next Bear Market?

The bull of Wall Street has shown stock investors its power, pushing the market to new record highs. Investors should be feeling pretty good. While I’m not one to be a party pooper, I am a promoter of preparation – especially when it comes to investing. It’s during rising markets that investors need to make sure they’re prepared for an inevitable downturn. The bull will succumb to the bear. It’s only a matter of when it occurs – not if. While it’s practically impossible to predict when the next bear market will bite, being ready for it can make all the difference. One of the greatest investors of all time, Sir John Templeton said, “Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Mark Twain said, “History doesn’t repeat itself, but it often rhymes.” Putting those words of wisdom together may result in the current bull market ending on what past Federal Reserve chairman Alan Greenspan called “Irrational exuberance.” Though by no means am I as insightful as those three gentlemen, I think it is timely and prudent now to be prepared with a plan to protect your principal for the next bear market. Preparing for a bear market decline involves several strategies to protect your investments and potentially capitalize on opportunities. Here are seven prudent ways prepare to survive and thrive when the market trend turns from bearish to bullish, and hopefully provide proper perspective:

1 – Bear markets are normal. There have been 27 bear markets in the S&P 500 Index since 1928. However, there have also been 28 bull markets—and stocks have risen significantly over the long term. As the graph below shows, bear markets historically don’t last as long as bull markets, and they have gone down less than bull markets have gone up.

2 – Have a Plan. No investors intently say, “I am planning to fail.” But, those who fail to plan, plan to fail. This is particularly true in investing. Even speculating should be done with a plan. Sticking to a well-thought out plan will serve you well, because it protects yourself against emotional investing. It’s easy to panic when you see stocks falling, but that is rarely a wise move. Investors who panic to avoid the bear market ultimately suffer, because they aren’t invested when the next bull market comes around. I sign off on all my Market Monthly podcasts with my 6 P’s: proper portfolio planning promotes positive performance.

3 – Be Diversified. When the next bear market strikes, most of your stocks will probably go down. The good news is that with a diversified portfolio, your non-equity investments will help offset at least some of the decline. Diversification means to spread investments across different sectors, regions, and asset classes. This reduces risk exposure to any single market downturn.

4 – Keep cash. Cash reserves reduce investment portfolio risk, protect principal and rewards investors with about 5% interest. Ensure you have enough cash reserves or liquid assets to cover living expenses for at least 6 months. Or 1 year.  This prevents you from having to sell stocks at depressed prices to meet cash needs. Cash is king in bear markets and your portfolio’s best defense. I like to say, “Sometimes your best offense is a good defense.” Especially true in bear markets.

5 – Avoid panic selling. Bear markets are temporary, and selling locks in losses. Ride out the downturn if you have a long investment horizon. Stay true to your plan and your rules-based investment process. The best question to ask is not “how is the market doing?”, but “how is my plan doing?”. Review your risk tolerance, goals, and asset allocation. Focus on diversification while minimizing concentration. If your portfolio cashflow is sufficient to meet your income needs and you own good businesses, why sell them? Do not panic. Avoid emotional decisions. Warren Buffett said, “You don’t want to be a no-emotion person in all of your life, but you definitely want to be a no-emotion person when making an investment or business decision.”

6 – Stay Informed. Keep current with relevant an timely global financial market and economic developments. By having an awareness of economic indicators, market trends, and geopolitical events that impact markets you will make informed decisions.

7 – Be Strategic. Effective ways to invest strategically include: set stop-loss orders. This will help you automatically sell if prices drop below a certain threshold. This helps limit potential losses. Have hedges. Non-correlated investments tend to trend opposite of the stock market. When the market zigs, these holdings zag. Other strategies are laddering bond portfolios and dollar-cost averaging. Don’t “bottom fish”. Be smarter than the bear.

Proper Perspective:  In our hectic and often hard to comprehend world, it is very easy to lose perspective. You may agree it is sometimes difficult to see the big picture. The media often doesn’t help with this, but unfortunately instead encourages us to see things in a most negative light. Here is hopefully a pause to gain positive perspective.

“My every right, constitutional, civil, political and judicial has been tramped upon.”

~~ Susan B. Anthony, 1874

What Happened On This Day June 20, 1782 – Great Seal of the US / eagle adopted.

INDICATORS OF INTEREST:

• Market’s Current Signal: Market in Confirmed Uptrend.  Analysis of the stock market over 130 years of history shows we can view it in terms of three stages – market in uptrend, uptrend under pressure and market correction. I analogize this to a traffic signal’s changing colors from green to yellow and then to red. It is still green. Since the 1880’s, this perspective has led to investment out-performance relative to market indexes. This is due to trend analysis which determines risk reducing, return enhancing market entry and exit points.

The Stock Market Trend: Confirmed Uptrend. From November 1 to last week the market was in a Confirmed Uptrend. Market action on April 12 triggered the weakened trend signal to Uptrend Under Pressure. After running higher 18 out of 22 weeks, the SP 500 fell 3 consecutive weeks. May 16 market action changed that again, triggering a positive trend change back to Confirmed Uptrend.

Here are key market levels as of Monday, June 17.

Recapping Last Week

U.S. equities reached fresh all-time highs before pulling back slightly after cooler-than-expected inflation reports. The Nasdaq Composite index rose more than 3%, while the S&P500 gained 1.6%. The Russell 2000 index surged 3% after last Wednesday’s CPI report but failed to hold the gains, losing 1% for the week. Eight of eleven S&P500 sectors were negative, but technology soared 5.6% after shares of Apple spiked 14% following the company’s AI-focused developers conference. Crude oil prices jumped nearly 4% after global inventory forecasts declined for the rest of 2024. U.S. Treasury bonds saw their best performance since December, sending yields tumbling to three-month lows. The main catalyst was U.S. CPI coming in flat for May while producer prices fell unexpectedly. The FOMC held interest rates steady as projected, but finally updated its outlook for rate cuts to what the market had seemingly already accepted—just one quarter-point reduction in 2024, with four cuts projected for next year. There are differences of opinion in this year’s forecast however—eight officials project two cuts, seven project one, while four are at zero. Strong demand at last week’s Treasury auctions also fueled the drop in rates. In other news, U.S. consumer sentiment fell in early June as inflation’s effect on personal finances remained worrisome and suggested lower consumer demand in coming months. Unemployment claims rose to a 10-month high at 242k for the week ended June 8, pointing to labor market easing.

Internationally, the Bank of Japan left interest rates unchanged but surprised traders by not providing specifics on a potential bond purchase reduction plan, sending the yen back to the April lows versus the U.S. dollar. Japan’s Q1 GDP was revised to show less of a contraction than previously reported. In China, CPI rose less than expected in May while producer prices dropped for the 20 the straight month, raising concerns over stubbornly weak domestic demand. The MSCI EAFE index of international developed countries fell 2.5% as French President Macron dissolved the country’s parliament and called a snap election after his party was trounced in the European elections. Finally, economic growth in the UK stalled in April while the unemployment rate rose to 4.4%, a two-and-a-half year high. Average earnings remained elevated at 6.0% YoY.

Current View

The stock market shrugged off weaker-than-expected retail sales data Tuesday as the S&P 500 and Nasdaq composite edged higher and marked all-time closing highs. The Nasdaq is closing in on the 18,000 level, a round number that’s a potential resistance level — although the Nasdaq didn’t have any problems when it gapped above the 16,000 level on May 3 and the 17,000 level on June 5. Still, the composite is now 8.2% above its 50-day moving average, a level the Nasdaq hit nearly one year ago on July 19, just before it made a 9% pullback. As of Tuesday, before the Juneteenth national holiday and market close, Nvidia rose to another all-time high and surpassed Microsoft as Wall Street’s largest company by market capitalization. Nvidia is quite extended after a torrid run; it’s now more than 13% above its 21-day exponential moving average.

Stocks rose modestly at mid-morning today, but have reversed lower from a higher open. This is especially the case for the Nasdaq. Profit taking? Yes, and overdue.

• Industry Group Strength:  BULLISH. As of yesterday, 129 out the 197 groups I monitor are up year-to-date. 68 are down.
• New Highs vs. New Lows: BULLISH.  In Tuesday’s session, there were 215 new 52-week highs and 186 new 52-week lows.
• Dow Dividend Yield:  BEARISH. The current yield for the Dow Jones Industrial Average is 1.98%. The 10-year Treasury now 4.25%. This rate is up from 4.36% a month ago.
• Volatility Index: BEARISH. Volatility has been volatile. The “VIX” is near 13. The same as 2 weeks ago. The index is also known as the “Fear Index.” It is considered a contrarian indicator and therefore viewed as bullish as it rises indicating investors are becoming more fearful. The VIX:

• Fear / Greed Index: BEARISH.  Investors are driven by two emotions: fear and greed. Too much fear can create a condition of oversold/ undervalued stock prices. Too much greed can result in overbought/overvalued stock prices. The AAII Investor Sentiment Index is now neutral.   BE FEARFUL WHEN OTHERS ARE GREEDY. At 42, the Fear & Greed Index is down from 44 2 weeks ago.

CLICK VIDEO FOR MORE ON THE “FEAR & GREED INDEX”

How CNNMoney’s Fear & Greed Index works

• Bull / Bear Barometer:  BEARISH. This secondary market indicator should also be viewed with a contrarian perspective. As of yesterday, according to the latest survey of stock market newsletter writers by Investor’s Intelligence (see below), bullish sentiment is 61.2%. The bear sentiment is now 17.9%. This reflects an increase in bullish and decrease in bearish sentiment over the last 2 weeks. Consider this a contrarian indicator because the crowd is often wrong at market tops and bottoms. In other words, extreme bullishness has been seen near several market tops in the past, while extreme bearishness has been seen at market bottoms.  Note how close market sentiment is near the 5-year bullish high and near the 5-year bearish low…

• Put / Call Ratio: BEARISH. The ratio of put-to-call options is 0.34.  About the same as 2 weeks ago. The put-call ratio tracks the mood of what options investors are doing, not just saying. They typically buy puts if they think a stock will decline and calls if they think it will rise. If they’re buying lots of puts, they see the market declining. And if they’re loading up on calls, they’re generally bullish. Historically, market bottoms occurred when the reading spikes to 1.2 or more. Market tops are often made when the reading is 0.6 or less. Note how reliable this is with respect to the February record low coinciding with the market high. Keep in mind this is also a contrarian indicator.

Global Economic Indicators & Analysis:

POSITIVE INDICATORS

Initial Jobless Claims Drop: The number of Americans who applied for unemployment benefits last week fell slightly, but new jobless claims stayed near a 10-month high, which may be related to the end of the school year. New claims declined to 238,000 from 243,000 in the prior week, the government said this morning. The number of claims two weeks ago was the highest since August 2023. New jobless claims surged last year after the school year ended, a pattern that may be repeating itself. The demand for labor has cooled a bit, though, so it’s also possible a strong labor market is showing some early signs of stress. Economists say it will take another month of jobless-claims reports to get a better idea. Many economists have been expecting layoffs to rise as high interest rates and lingering inflation slow the economy and depress the demand for labor.

Business Inventories Rise: Businesses inventories, or products waiting to be sold, rose 0.3% in April to reverse a small decline in the prior month, pointing to a stable economy. Higher inventories are typically a positive sign and add to gross domestic product. Sales also rose 0.3% in the month, the government said Tuesday. The ratio of inventories to sales was flat at 1.37 That’s how many months it would take to sell all the inventory on hand. The current level of inventories is consistent with an economy growing at a modest pace.

Industrial Production Shows Large Increase: U.S. Industrial production rose 0.9% in May, the Federal Reserve reported Tuesday. That is the biggest gain since last July. Capacity utilization rose to 78.7% from 78.2% in the prior month. The capacity-utilization rate reflects the limits to operating the nation’s factories, mines and utilities. Manufacturing rose 0.9% in May after a 0.4% fall in the prior month. The jump in production follows two months of weak readings. Economists had expected manufacturing to improve as the year went on, but not at such a strong pace. So far in the second quarter, the level of industrial production is up 2.5% at an annual rate over the first-quarter average.

Import Price Index Falls Sharply: The cost of U.S. imported goods fell in May by the largest amount since the end of last year, adding to recent evidence inflation might be slowing again. The cost of imports shot up in the first four months of the year after a long period of decline, contributing to a mini-surge in U.S. inflation. Yet consumer and wholesale prices flattened out in May and offered hope that the flareup in inflation has mostly run its course. The cost of imports have risen 1.1% in the 12 months that ended in May, the same as in the prior month. Inflation is still running above low pre-pandemic levels, but if prices continue to ease over the summer, the Federal Reserve could cut interest rates as early as September.

PPI Index Drops: U.S. wholesale prices fell in May for the second time in three months — thanks partly to lower gas prices — in perhaps another sign an upturn in inflation earlier this year is fading. More important, a separate measure of wholesale prices that strips out volatile food and energy costs and trade margins was flat for the first time in a year. The Federal Reserve views core prices as a better predictor of future inflation. The rate of inflation is still running above the Federal Reserve’s 2% annual goal, but the latest CPI and PPI reports suggest the central bank is making progress.

Feds Keep Rates Steady: The Federal Reserve said last Wednesday it was keeping its key interest rate unchanged as it fights elevated inflation rates that have been pinching U.S. businesses and consumers. In a statement last Wednesday, the central bank said economic activity “has continued to expand at a solid pace,” while job gains “have remained strong, and the unemployment rate has remained low.” Though inflation has eased over the past year, it remains elevated — even as there has been “modest further progress toward the Committee’s 2% inflation objective.” The Fed now projects just one rate cut in 2024, down from multiple ones in its previous projection.

Comments from Chairman Powell: Federal Reserve Chair Jerome Powell was tight-lipped at his press conference last Wednesday, having been stung previously by too much optimism. The softer-than-expected May CPI data had economists thinking that two interest-rate cuts this year were a slam dunk. They were taken aback when the Fed’s new forecast showed only one cut this year. Pressed at his news conference to explain, Powell said that the May CPI data “was certainly a better inflation report than almost anybody expected,” but he stressed the data was only for one month. In his prepared remarks, Powell said “if the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we are prepared to respond.” The language on inflation was new. In his comments at his last press conference in May, Powell had only mentioned cutting if there was weakness in the labor market. In his press conference, Powell said many Fed officials viewed one versus two rate cuts this year as a close call, and that they would be open to either, depending on the data.

CPI Points to Slower Inflation: The cost of consumer goods and services were unchanged in May for the first time in almost two years, suggesting a resurgence in inflation earlier in the year might be petering out. The rate of inflation rose at a 3.3% pace in the 12 months ended in May, down from 3.4% in the prior month. Part of the reason inflation was muted last month was because of a decline in gasoline prices. They dropped 2.8%. Yet omitting energy and food, the so-called core rate of inflation also rose a modest 0.2%. That is the smallest gain in seven months.

NFIB Optimism Index Soars: The NFIB Small Business Optimism Index reached the highest reading of the year in May at 90.5, a 0.8-point increase but still the 29th month below the historical average of 98. The Uncertainty Index rose nine points to 85, the highest reading since November 2020. Twenty-two percent of owners reported that inflation was their single most important problem in operating their business, unchanged from April and the top business problem among owners.

Consumer Credit Rises, Credit Cards Drop: While total consumer credit rose in April, consumers shied away from using credit cards, according to the latest government data released last Friday. Total consumer credit rose $6.4 billion in April, up from a revised $1.1 billion drop in the previous month. That translates into a gain at a 1.5% annual rate, recovering from a 0.3% drop in the prior. Revolving credit, like credit cards, dropped at a 0.4% annual rate in April after a 1.5% rise in the previous month. This is the first such drop since April 2021. The job market remains strong and this is supporting the U.S. consumer.

Wholesale Inventories Increase Slightly: Inventories are goods produced for sale that have not been sold yet. Businesses tend to increase inventories when sales a rising. Sales in the month also rose a scant 0.1%. The ratio reflects how long it would take a company to sell all the goods sitting on warehouse shelves. Right now it signals the that businesses are producing enough goods to keep up with demand, but they are not overstocking.

U.S. Jobs Report Shows Strength: The U.S. created a bigger-than-expected 272,000 new jobs in May, suggesting the economy is still fairly strong and reducing the chances the Federal Reserve will cut interest rates soon. The unemployment rate, meanwhile, rose to 4% from 3.9%, the first time it’s hit that mark since January 2022. More people said they lost their jobs last month, however, and fewer people entered the labor force. There weren’t many signs of a slowdown in the May jobs report. Wages, for instance, jumped 14 cents, or 0.4%, to $34.91 an hour. The yearly increase in wages also moved up to 4.1% from 4%. Wage growth has been stuck around 4% or so since last fall.

Retail Sales Sluggish: Sales at U.S. retailers barely rose in May, suggesting Americans are feeling the weight of lingering inflation and high interest rates. Sales in April were also revised to show a decline, instead of no change as originally reported. Retail sales are a big part of consumer spending and offer clues about the strength of the economy. Sales are still rising at a pace consistent with stable growth, but they may have slowed enough to help the Federal Reserve in its fight against in inflation. Sales of new vehicles and car parts, an up-and-down category, increased 0.8% last month and padded the headline retail number. Perhaps the biggest negative in the May retail report was a 0.4% decline in spending at restaurants. Restaurant spending has fallen in four of the past six months for the first time since the pandemic. Restaurant sales tend to rise when the economy is healthy and Americans feel secure in their jobs. Sales decline during times of economic distress. Households are feeling more financial strain, but unemployment is low and the economy is still in good shape overall.

Empire State Manufacturing Contracts Again: The New York Fed’s Empire State business conditions index, a gauge of manufacturing activity in the state, rose 9.6 points in June but remained in contractionary territory at a negative 6 reading, the regional Fed bank said Monday. Any reading below zero indicates deteriorating conditions. This is the seventh straight month of contraction. The new orders index climbed 15.5 points to negative 1 in June. That’s the highest reading in nine months. Firms were more optimistic about the future than they have been in more than two years. The index for future business conditions climbed 16 points to 30.1. The Empire State index has been fluctuating in slightly negative territory over the past year and a half.

Consumer Sentiment Falls to 7-Month Low: An early reading of U.S. consumer sentiment in June fell to the lowest level in seven months, reflecting lingering worries about high inflation as well as slower growth in household incomes. The first of two readings of the consumer-sentiment survey dropped to 65.6 this month from 69.1 in May, the University of Michigan said last Friday. The index has fallen three months in a row. Consumers think inflation will average 3.3% in the next year, the same as in the prior month. The rate of inflation based on the consumer price index rose 3.3% in the 12 months ended in May. Middle- and lower-income Americans are more worried about inflation than wealthier households, the survey found. Since less wealthy families tend to spend more of their income on necessities, any decline in spending could hurt the U.S. economy. The Federal Reserve is aiming to reduce inflation to 2% annually by using high interest rates to slow the economy. But the Fed won’t cut interest rates until inflation falls slows further, making it harder for people to buy a car or house or for businesses to invest.

U.S. Budget Deficit Continues to Shock: The cumulative U.S. budget deficit has reached $1.202 trillion with the federal government now two-thirds through its current fiscal year, driven in part by rising interest payments on the national debt. This outrageous number works out to $4.9 billion per day. The deficit totaled $347 billion in the month of May, an increase of 44% from the gap in the same month a year earlier, the Treasury Department said last Wednesday. In May, government tax receipts rose 5% to $324 billion. Government spending rose 22% to $671 billion in May. Net interest payments reached $601 billion in the first eight months of fiscal 2024. That topped outlays on national defense at $576 billion.

Call me if you have any questions. I am always happy to help!

John J. Gardner, CFP®, CPM®, AIF®

Blackhawk Wealth Advisors, Inc.

3860 Blackhawk Rd. Ste. 160 Danville, CA. 94506

Phone: 888-985-PLAN · Email: jg@blackhawkwealthadvisors.com

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For my Market Monthly podcast, click on the link below. I provide a review of global stock market highlights over the past month and preview of the month ahead. Forward insights and perspectives are based on current financial market and economic trends with an emphasis on relevant developments in various areas from Fed policy to company earnings announcements.