The Weekend Edition is pulled from the daily Stansberry Digest.
Slower growth, higher inflation...
If that sounds like a concerning combination, we agree... And it's what Uncle Sam's first-quarter GDP report showed Thursday morning.
Economic growth was a reported 1.6% annualized from January through March. Most of Wall Street and even the Federal Reserve had anticipated growth in the mid-2% range. The same report showed first-quarter inflation at 3.4% annualized, which investors could have already deduced from existing data.
However, the obvious contrast in a single document about GDP made for a stark realization: a slowing economy paired with rising inflation?
The market had a knee-jerk reaction to the news...
The "landing" might be hard, after all... David Donabedian, chief investment officer of CIBC Private Wealth, described Wall Street's initial reaction well in a quote to CNBC.com: "This was a worst of both worlds report."
The major U.S. indexes went into the red quickly on Thursday's open. And, while they clawed back losses throughout the day, they still finished down.
Meanwhile, bond yields rose across the curve to levels not seen since early November, suggesting higher inflation expectations. The 10-year Treasury yield is now above 4.7%, the 2-year yield is a hair above 5%... and the 30-year yield is at 4.8%.
But we saw signs of healthy "correction" behavior, too...
"Communications" took the biggest hit of any major S&P 500 sector. It fell roughly 4%, weighed down by Meta Platforms (META). The social media company's shares were off by as much as 12% following its earnings call on Wednesday with a cautious outlook.
"Defensive" sectors like utilities and materials were up slightly, and no other major S&P 500 sector was down by more than 0.6%. Then Friday, the major U.S. indexes opened higher. My colleague and Ten Stock Trader editor Greg Diamond wrote this to his subscribers earlier this week...
If this recent decline was going to get ugly, we likely would not see this type of price action. In other words, everything would be down.
This tells me the latest drop is a correction. But patience is likely key, in order to see how it unfolds over the next few weeks.
I recently said that the next week or so wouldn't be boring, given earnings from headline-making, monster-cap companies, the GDP report, inflation data, and next week's Federal Reserve meeting.
Sure enough, we're off to a wild start. Fear has reentered the market.
And as I'll explain today, it wouldn't be surprising to see more investors head for the hills in the coming weeks...
Let's pause and think about what this report may or may not indicate...
First, note that this GDP report was a backward-looking take. It showed one big thing that we've known already: inflation has been running "hotter than expected" the past several months.
Second, GDP was still rising (albeit helped by government spending, including higher federal job costs), as was consumer spending. However, this data suggests that growth slowed more than expected. And in the same report, consumer spending was also lower than expected in the first quarter (up only 2.5% versus Wall Street's 3% consensus expectation).
In short, these numbers suggest uncertainty rather than any specifics about what comes next... which is why I suspect enough investors reacted like they did earlier this week.
Consumer spending is an area we'll want to watch closely, as it was when analysts were on "recession watch" in 2023. Consumer spending accounts for about 70% of economic activity. A continued dent in it would have significant knock-on effects...
Lower consumer spending could leave businesses with lower earnings and tighter margins, possible cost cutting, and job losses. In turn, that could put more pressure on consumers who are dealing with higher prices and debt... and more pressure on businesses facing higher costs and debt.
(Meanwhile, Uncle Sam just keeps on spending and passing on debt to everyone else.)
It's reasonable to look at how things could get ugly...
Mike DiBiase, the editor of Stansberry's Credit Opportunities, shared an essay with us recently that discussed possible cracks in the economy. He wrote...
I'm seeing all the troubling signs you'd expect to see leading up to a recession. Credit-card debt is rising fast and at an all-time high. Delinquency rates on credit cards and car loans are rising.
Mike also warned that he expects "a recession and credit crisis a new bear market within the next year"... and that now is the time to prepare for it.
Looking ahead, if the Fed is really still concerned about inflation, one could argue that it should raise rates... or, at the very least, keep them where they are until the pace of inflation gets to its supposed 2% goal.
However, let's say growth and consumer spending continue to slow, at least compared with the second half of 2023. Elevated rates – meaning higher borrowing costs – would risk straining the economy further, potentially leading to job losses and a recession.
Add it all up and the headlines are suggesting we're in a lesser-acknowledged version of 1970s-style volatile high(er) inflation territory. I don't necessarily disagree. But that doesn't mean it's a good idea to sell all of your stocks tomorrow, either.
In times like today, I'm reminded of something I first read about in the December 2021 edition of our True Wealth newsletter...
"First-level thinking," editor Brett Eversole wrote, is the obvious – the "herd" mentality. But to make outsized returns in the market, you want to use "second-level thinking" instead.
Brett quoted a passage from famed investor Howard Marks' great book, The Most Important Thing, which touches on exactly the scenario we're talking about today. Marks wrote...
First-level thinking says, "The outlook calls for low growth and rising inflation. Let's dump our stocks."
Second-level thinking says, "The outlook stinks, but everyone else is selling in panic. Buy!"
Here's a second-level idea... If the economy weakens more than expected this year, the Fed could step in with lower rates sooner than the market now expects. And this could trigger another "Fed's going to cut" rally in stocks like we saw start late last year.
I'm willing to bet that if the unemployment rate picks up in the months ahead, Fed rates will go lower, even if inflation remains elevated. That's not great news for the value of dollars, of course. But this all-too-common "papering over" of problems can juice markets.
That's also not to say, though, that the market might not endure some more pain or volatility first. For now, we may be facing a tougher new reality in which "bad news" is taken as "bad news" in the market (rather than a "good news" sign of likely rate cuts).
All in all: Fear was the top word of the week, and it could remain popular in the weeks ahead.
But there is one way to profit from the fear...
Our founder Porter Stansberry is stepping forward with a major warning at his firm, Porter & Co. He believes 2024 could bring a massive reset to the U.S. economy. In fact, he says it's going to be "the greatest legal wealth transfer in human history."
And yet, no one is talking about it.
This shocking event will blindside many Americans. But luckily, there's a way to take advantage of this situation... And it all starts with an approach to investing you might never have considered before.
So if you want to learn more about this urgent warning, click here.
Good investing,
Corey McLaughlin
Editor's note: According to Porter, there are more cracks under the surface than the government or talking heads are willing to admit. A rare type of crisis is brewing – one that last shook the country more than a decade ago.
But for those who know how to capitalize on this financial event, it could create unprecedented opportunities to see double-digit annual yields... with double-, or even triple-digit, capital gains on top.
That's why Porter recently sat down to share the details, including how you can prepare your portfolio today. (Here's a hint... It's not with stocks.) Click here to learn more.
