Bulls On Parade

Date: 8/04/2022
Author: Mr. X

The debate over whether we are in a recession or not misses the point.

Both sides have strong arguments. Pessimists and/or political opponents of President Joe Biden can accurately argue that the technical definition of a recession has long been two negative quarters. It doesn’t help the Administration’s defenders that many of the same people are on record as defining a recession this way not long ago.

Yet the Biden Administration’s argument that America’s economy is simply in “transition” has some merit. The COVID-19 pandemic and associated shutdowns led to massive imbalances in the American economy. Certain tech stocks, remote working companies, and killer apps for the new Age of Social Distancing benefitted massively from the pandemic (even if it wasn’t the kind of thing you brag about.) Now, many of them are suffering a massive readjustment.

Consider the fate of the following companies.

  • Robinhood (HOOD) is down more than 85% over the last year, and that’s after gaining more than 11% yesterday.
  • Peloton (PTON) is down more than 67% over the last year, and that’s again after large gains yesterday.
  • Zoom (ZM), perhaps the most iconic company of the pandemic, is down almost 39% over the last year.

In contrast:

  • Ford (F) is coming off the best month in its history since the Great Recession of 2009.
  • Valero Energy Corporation (VLO) has gained almost 68% over the last year, profiting from high oil prices.
  • Target Hospitality Corp (TH), which provides lodging for workers in the oil industry, has gained over 270% over the last year.

Some companies overextended themselves, thinking that COVID-19 restrictions would last forever. Now that countries are dropping restrictions fast (even as health officials warn the pandemic isn’t over), airlines, travel, and hospitality stocks are doing well. Ford (F) is getting boost both from its determination to restructure and pay off debt as well as its increasingly strong EV division. Energy companies have also benefitted massively from high oil and natural gas prices.

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The question now is whether tech and growth stocks, having lost so much ground, are in position to recover. There are some signs to think we are at the beginning of another bull market. These include 55% of stocks hitting 20-day new highs (the first time that’s occurred since June 2020) and the 10-day gains far outpacing 10-day declines. Other technical signals suggest this is something deeper than a mere “bear rally.”

There are reasons to think otherwise, notably the cutbacks from many tech companies (including Microsoft (MSFT) and Alphabet (GOOGL)) as well as the weak guidance from companies like Advanced Micro Devices (AMD). Yet much of this is backward looking. Cutbacks are likely to increase profitability and the jobs market remains strong, cutting down on some of the political dangers of slashing the workforce. There’s also a zero-sum gain here. As Europe suffers from high energy prices and China from its own misguided zero-COVID strategy, the United States is regaining its dominant economic position. While this may hurt some multinational companies on the margins, a strengthening core American market may balance it out.

However, the Federal Reserve seems almost determined to squash this emerging recovery. San Francisco Federal Reserve President Mary Daly recently said that she saw “some bright spots” regarding the overall strength of the economy. Unfortunately, she added that “if we just see inflation roaring ahead undauntedly, [and] the labor market showing no signs of slowing, then we’ll be in a different position where a 75-basis-point increase might be more appropriate.” A 75 point raise instead of a 50 point raise in September would quash this market very quickly.

Neel Kashkari of the Minneapolis Federal Reserve said it was “a very unlikely scenario” that the Fed will cut interest rates next year. Instead, he predicted more increases. Federal Reserve Chairman Jerome Powell has already prepped the market for another sharp increase in September.

There is a real danger the Federal Reserve will react too strongly against inflation, particularly as this an election year. With Republicans campaigning on inflation during the midterm elections and Democrats like Senator Elizabeth Warren (D-Mass) publicly criticizing the Fed, anything the central bank does will be sure to disappoint someone. Despite its supposed nonpartisan, apolitical stature, the Fed is as vulnerable to political pressure as any other government institution.

The correct attitude to take now is one of cautious optimism. Energy prices are declining. The jobs market is strong. America’s international position is strengthening. But this is not the COVID-19 retail trading boom. The “real” economy of food, energy, and precious metals will become increasingly important as international competition intensifies. While it’s important to have an “abundance mindset” personally, remember that the rest of the world is facing scarcity right now. Invest accordingly.

Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.

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