Capital 19 Catch-Up

Weekly Index Movement

Aussie All Ords-6.7%

Do you want the good news or the bad news first?

Let’s start with the good news.

The S&P 500 is on pace to experience its 9th quarterly decline of 15%+ in the post-WW2 market era. Following the prior 8 quarterly drops of 15%+, the S&P averaged a gain of 6.22% the following quarter, a gain of 15.15% over the next two quarters, and a gain of 26% over the next year. Over both the next half year and year, the index was higher every single time.

The S&P is also down 23% in the first half of 2022. Forward returns following prior two-quarter drops of 20% or more are similarly bullish. Every time the S&P has fallen 20%+ over any two quarter period since WW2, the index has been up at least 22% over the next year (or next four quarters).

History tells us now might well be a good time to buy.

We went into more detail about this last week. You can read those comments at

Bear Market Analysis

Now, time for the bad news.

We think things will get worse before they get better

Fed Chair Powell upset us last week when he surprised everyone with his comments. We will forget about the +75Bps rise he hit growth assets with and instead look at the far more important comments from the press conference.

The most worrying of his comments was this

“we’re responsible for inflation, which means headline inflation”

This is a dramatic shift from the last 30 years where they focussed on core-inflation and the big problem is, headline inflation includes the price of oil (specifically it is the price of gasoline but they are closely linked)

The Fed has very blunt tools at its disposal namely just interest rates and words. Interest rates themselves cannot bring down the price of oil. The only thing that can do that is a reduction in demand and the only thing that will reduce demand is a contraction of the economy – otherwise known as a recession.

This is why stocks fell so much last week, Powell basically told the market he is going to stuff everything up and send the economy into a recession.

Aussie stocks fell hard on the news because our mining sector is cyclical and its fortunes rise and fall as economies expand and contract.

A recession is now definitely coming ladies and gentlemen. Previously we hoped the Fed could subtly navigate to slow growth and avoid recession. But thats gone out the window now.

The strange thing is – the US might already be in a recession.

Q1 US GDP was negative at -1.5%. All we need is negative GDP for Q2 and that will confirm a US recession.

We will get the first GDP read for Q2 on July 28th. But the Atlanta Fed has this great predictor they call GDPNow. This takes all the other economic announcements and puts them through a model to give a real time guess as to what GDP is likely to be. It’s great because we don’t have to wait for the actual figure to get a good idea.

Here it is

The Atlanta GDPNow model is forecasting GDP to be sitting at 0.0 for Q2. But it is the trend that has us concerned. Forecasts have steadily been getting worse for the last 6 weeks as each economic number is announced.

It is entirely possible that the US is already in a recession and all we are waiting on is confirmation on July 28th.

This is not as bad as it sounds. In some ways, being in a recession now is better than fearing a recession is coming.

The stock market is always ahead of fundamentals and is likely to bottom well before the economy does.

Which leads to us to the game of bottom picking. There is very little accuracy in this game but we can use some historical precedents to help us.

In past recessions, stock earnings have declined by around 25% from their peak. Peak earnings for the S&P500 is an annualised $216 per share. A 25% reduction in this would see annual earnings at $162 per share.

A PE of 18 (about average) would have the index at 2916. That is 20% below the current index of 3673.

So, even though stocks have come down a long way, there could still be more pain to come if this recession hits earnings like previous recessions have.

It all sounds rather negative, but we do have reason for quite a bit of hope. This bear market has happened a lot faster than previous bear markets which leads us to expect it will be of short total duration. The market has adjusted to news a lot faster than in the past. It will adjust to positive news just as fast.

Market bottoms occur at peak pessimism. We haven’t got there yet. Maybe the GDP announcement on July 28th will be what we need. Confirmation of a recession. That should coincide with peak pessimism and be the time to buy stocks.

For now, stay cautious and consider inverse ETFs like SDS and QID that we mentioned last week.

Call us if you need more help with these, or similar ETFs.


Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account.