This Time Is Not Different

Fear hits the market... The jobs market keeps weakening... A sentiment shift in stocks... This time is not different... A reliable recession indicator flashes... Another forgotten one... What to do and what could come next... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] Fear hits the market... The jobs market keeps weakening... A sentiment shift in stocks... This time is not different... A reliable recession indicator flashes... Another forgotten one... What to do and what could come next... --------------------------------------------------------------- 'Fear' is back... When the U.S. markets opened this morning, panic could be seen all over. The CBOE Volatility Index ("VIX") – what some consider the market's "fear gauge," a measure of options activity on the S&P 500 Index – spiked from below 20 for most of last week to above 60 this morning. That's its highest level outside of the COVID-19 panic in March 2020 and the onset of the great financial crisis in 2008. The major U.S. indexes were down by 3% or more across the board... Treasury yields were down (meaning bond prices were up)... Bitcoin briefly traded below $50,000... Even gold was down 2%... By closing, the picture more or less looked the same. The VIX measured around 38... off its morning peak but still its highest level in years. The Nasdaq Composite Index and S&P 500 were down 2.9%, the small-cap Russell 2000 Index was off 3.2%, and the Dow Jones Industrial Average was off 2.6%. This was the first "everything is down" day like this since the early days of the bear market of 2022 or the pandemic panic if you want to use volatility as a marker. Anecdotally, the trading platforms of some major brokerages, like Charles Schwab, Fidelity, and Vanguard, also appeared to be down for periods this morning due to a surge in user activity. It didn't even take that much to trigger a sell-off... Late last week, monthly U.S. manufacturing data showed evidence of contraction and weekly jobless claims increased to almost 250,000, an 11-month high. Then on Friday, new "nonfarm payrolls" jobs data from Uncle Sam showed the unemployment rate rising to 4.3% in July, up from 4.1% in June. That was the fourth straight month of an increase, and it's up from 3.9% just in February and 3.5% in July 2023. The jobs report also showed employers adding 114,000 jobs in July, well below mainstream economists' expectations and the lowest number since April. This is the latest in a gradual weakening of the labor market since the start of 2022, which is when the Federal Reserve began its higher-interest-rate campaign to "fight" 40-year-high inflation. But it was like a pin in the bubble. Add it all up, and last week's jobs reports were significant enough to get enough investors thinking seriously about the prospect of a U.S. recession ahead... triggered (finally) by the fastest rate-hiking cycle of its scale and a year of interest rates higher than they've been since 2007... The S&P 500 is down more than 6% since last Wednesday's close and 8.5% since its most recent all-time high on July 16. Stocks have been selling off around the world in the past few days, with Japan taking the worst hit. Today, it experienced its worst one-day sell-off (a 12.4% drop) since the October 1987 "Black Monday" crash. A Bank of Japan announcement last week about interest rates going higher there, combined with the growing idea of lower U.S. rates, strengthened the yen against the dollar and cratered Japanese stocks. This time is not different... If you've been following along with me (Corey McLaughlin) in the Digest over the past several months and the past year, you know we've been expecting this kind of market behavior to show up eventually... because this time is not different. As I wrote just [in last Tuesday's edition]( when we previewed the Fed meeting the next day and inflation and jobs numbers due out at the end of the week... In the very short term, tomorrow's Fed meeting and new inflation data and jobs numbers that will hit the market later in the week could serve as a catalyst for the market to move – one way or another. If enough investors like what they hear – like continued "disinflation" and a central bank bent on easing monetary policy – stocks could march higher. Of course, that reaction ignores the reason why the Fed might be cutting rates... like the economy weakening and the unemployment rate rising. At some point, that part of the story will become important to the majority of Wall Street. But it doesn't appear that we're there yet. Today, we were "there." We've noted the increasing unemployment rate over the past few months and its risks to the market. A weakening labor market means a weaker "consumer" and less consumer spending, which about 70% of U.S. economic activity is tied to... This means a tougher time for businesses... which is why this rising unemployment rate has many investors concerned about a recession. Some point to the 'Sahm rule' as a good indicator... I most recently wrote about this [on July 1]( in a report talking about the rising unemployment rate... You don't hear many people talking about it, but the "Sahm rule" – associated with the onset of recessions – is in play again. This indicator is named for Claudia Sahm, an economist and onetime employee at the Fed. Basically, it's a measure of the change in the unemployment rate, and it has a perfect record of signaling recessions over the past 50 years. The rule says that whenever the government's unemployment rate rises 0.5 percentage points off a cycle low – the difference between the current three-month average and the past year's three-month-average low – we're in a recession. We're getting close – again. The unemployment rate has flirted with triggering this "rule" a few times over the past year or so... As our colleague and DailyWealth Trader editor Chris Igou [wrote to his subscribers today]( the Sahm indicator hit 0.53 percentage points as of Friday's jobs report that covered July. This is an important point, as he wrote... In the chart below, you can see this has been a tipping point for the U.S. economy. And recessions tend to already be underway or getting started when this indicator flashes... There have been 12 previous recessions since 1949. And it flashed near the start of each and every one. Even more, it hasn't had one false signal over that 75-year period. That means that every time the Sahm Rule broke above 0.5, a recession took place. Now, it doesn't tell us how bad the recession will likely be or how long it will last. But its perfect record means you should pay attention. Here's one more recession indicator you might have forgotten about... The inverted yield curve... Regular readers know this is when shorter-term yields like the 2-year Treasury rate are generally higher than longer-term yields like the 10-year. This behavior has preceded each of the past eight recessions in the past five decades by anywhere from six to 24 months. This inversion happened again in 2022... yet "no recession" so far. Well, with today's action, the 10-year/2-year Treasury spread is nearly un-inverted, which is typically a move you see just ahead of an "official" recession... The link here is that more Fed-dependent shorter-term rates move lower than longer-term ones when the economy is slowing, and the central bank wants to juice it and avoid a recession or depression. The next 'war'... We've also talked here about how the Fed is the undisputed king of "fighting the last war" – this one being inflation – while the labor market was the next big thing to watch. As I wrote last month... Sahm rule or not, the labor market continues to weaken... Unemployment has trended higher since a low of 3.4% in April 2023. Tack a few months onto the formal definition of the Sahm rule, and you could say it's warning of a recession already. If the trend continues, Sahm's indicator could trigger in the months ahead. It also could not, but the labor market could weaken more in a slow-burn style that never triggers the indicator but has the same effect on folks who lose their jobs. Until about now, though, enough investors cheered most data that suggested the Fed would cut its lending rate because it meant an easier monetary environment ahead. Today's market reaction, however, looked like the inevitable next part of that story we've been expecting... The Fed will be cutting rates, perhaps sooner and by more than the market had thought, because the economy is worsening quicker than anticipated. And we're just talking about one part of the economy today – the labor market. We don't have our heads in the sand about whatever political or geopolitical impacts – like further war – might roil the markets as well in the months or year ahead. In any case, bad news for the economy has become bad news for stocks... Or, at least, the market appears to be shifting its mindset from opportunity to concern. On CNBC this morning, the topic du jour wasn't whether the Fed will cut rates, but how many the central bank "should" make and what kind... 50 basis points, or the 25 that investors were already largely expecting in September... or an "emergency" rate cut before then... Federal-funds-rate futures traders tracked by the CME Group's FedWatch Tool are now mostly betting on anywhere from 100 to 150 basis points of cuts by the end of the year, after putting barely odds on the idea at this time last week. In other words, the prevailing mainstream thought, at least, has quickly become "How bad will it get?" about the labor market and economy in general. We're coming off a Fed decision and press conference that started this conversation in earnest with a tacit acknowledgment from the central bank and Fed Chair Jerome Powell that rate cuts were likely coming soon... During an interview on CNBC today, as the market was selling off, Chicago Fed President Austan Goolsbee suggested investors were overreacting to one report and that the Fed can and will "fix" the economy if it deteriorates. That's rather presumptuous of him... And it also sounds like someone from an institution that is once again still behind the curve on the economy... like when the Fed said inflation was "transitory" four years ago. Now it could be late to an unemployment spike. What comes next?... I won't promise you exactly what will happen in the future, but I will offer some ideas to consider, and you can make your own judgment. The questions about the labor market remain open-ended and are legitimate. And I can see them remaining so, even if or when the Fed starts cutting rates in September. Plus, these concerns about the labor market are now at the forefront of investors' minds. If the outlook gets "worse" and the trend continues with no resolution in sight, market reactions like those we saw today and over the past few trading days may reappear until the "bad news becomes less bad." True Wealth founding editor Dr. Steve Sjuggerud, who uses this idea to gauge potential turnarounds in a sector or market, etched it in my mind. This kind of "bad news" shift can play out longer than you might think once it gets started – much like bullish trends to the upside – and the markets appeared to hit an inflection point today. As I've written before, the Fed also historically wildly underestimates the extent to which the unemployment rate ends up in a recession. As I wrote on July 11... For example, in 2007, the Fed forecast less than half a percentage point of a rise in unemployment... and the rate ended up growing by more than 10 times that amount. The bank significantly miscalculated the rise in unemployment in 1973, 1981, and 1990, too. According to ClearBridge Investments, since 1969... Specifically, Fed forecasts have underestimated the rise in unemployment by 2.5% on average. If this holds, unemployment could rise above 7% in the coming potential downturn, which is hardly consistent with a shallow recession. So, if we are on the verge of a recession, or if one has already started, more downside may be ahead for the economy (and stocks) before things get better. Much like we wrote just a few weeks ago in our July 18 edition... As our Stansberry's Credit Opportunities editor Mike DiBiase has [pointed out before]( stocks tend to "bottom" during or after recessions, not before. And as Mike wrote [earlier this year]( most recessions have begun only after the Fed starts cutting rates. The way things are going with the Fed's favorite data, economists won't declare an "official" recession until later this year at the earliest, if at all. But that doesn't mean stocks couldn't start a leg lower from all-time highs before then. Plus, we don't need to tell you about the weaknesses elsewhere in the economy below the surface... like in commercial real estate, or with "zombie" companies that can't even afford to pay the interest on their debts. A slowing economy doesn't help any of them, either. As one of Warren Buffett's famous lines goes, it's only when the tide goes out that you discover who has been swimming naked. What to do... First things first, panicking like the rest of the crowd won't do much good. Remember your investing plan, which might include concepts like sticking to your stop losses. If you get a notification from one of our editors with instructions to sell a position, or you hit stops that you're tracking on your own, follow them. Keep an eye on buying opportunities in the next crisis, in high-quality stocks, or assets like distressed corporate bonds, which Mike recommends in Credit Opportunities. Hopefully, you also have a timeline in mind for your investments (like three months, three years, or three decades, for example), which can make decisions a lot easier. For example, shorter-term investments are riskier than very long-term holdings of companies that will reward you through a potential recession and again after it – if your timeline gives you the flexibility to wait out a downturn. But if you think the markets will keep you awake tonight, you might want to take some profits off the table... or trim some positions where you might have too much exposure. How to know if or when to sell... Again, first, follow our editors' guidance in their model portfolio instructions, be it our flagship Stansberry's Investment Advisory, Dr. David "Doc" Eifrig's Retirement Millionaire, or our suite of Portfolio Solutions products. If an immediate move is suggested with an open position or positions, our editors will tell you. And some will let you know by e-mail if a position triggers a stop loss, while others expect you to track your own stops based on your own entry price or a recommended "sell" level. I also cannot think of a much better time to listen to what our founder Porter Stansberry talks about in his [brand-new presentation]( that debuted last week. It's free and you can watch here. Not only did Porter share his outlook on the markets, the economy, and the country in general, but he offered the chance to try an incredible investing tool that can take the guesswork out of when to buy and sell the stocks that are in your portfolio. This is the kind of tool that can pay off exponentially for individual investors in times of great volatility like we've seen today – and could see if the economy weakens more from here. Learn more in Porter's presentation and be sure to stick with it until you hear from the special guest who joins him about midway through the event. He gives you all the details about how exactly to know "when to sell." It's an incredibly important thing that many folks never think about until it's too late and emotions get the best of them. Check out the presentation [right here](. As for buying opportunities, be careful just yet... Veteran investors know that these kinds of "panic" periods can often be terrific long-term buying opportunities. But you also don't want to be too early buying during them, either, and get in when they're still in the early stages of a slump. You might see buying opportunities in high-quality shares of businesses that have fallen to more attractive valuations, but be wary of "catching a falling knife," too. The tech-heavy Nasdaq, even after falling by about 7% the past five trading days, is still about 3% above its longer-term 200-day moving average... So is the benchmark S&P 500. If more downside still lies ahead, the major indexes could test their longer-term technical averages first, and breaks below them could signal much more risk ahead. Alternatively, though, today's panic could be just that, followed by a bounce and a breather. But that doesn't mean the recession risk that caused the anxiety isn't a legitimate fear. --------------------------------------------------------------- Recommended Links: [Here's What You Missed Last Week: Porter's Urgent Update]( The CEO of the world's largest independent financial research firm, Porter Stansberry, just answered your most pressing questions: Is the new AI mania, which already rivals some of the biggest financial bubbles in history, about to destroy your wealth? Is the market crash that he has been calling for just around the corner? And what exactly should you be doing next? [Click here to stream the replay now](. --------------------------------------------------------------- [99% of Investors Are Making This Nvidia Mistake]( Nvidia has had an incredible run. But if you're buying Nvidia alone to potentially profit from AI, you're making a mistake. Senior technology analyst Eric Wade says there are four "backdoor" plays that could double or triple your money this year thanks to Nvidia but are trading for a fraction of the cost. [Click here to get all the details](. --------------------------------------------------------------- New 52-week highs (as of 8/2/24): Automatic Data Processing (ADP), Brown & Brown (BRO), Colgate-Palmolive (CL), Coca-Cola Consolidated (COKE), Cencora (COR), Direxion Daily Real Estate Bull 3X Shares (DRN), Hologic (HOLX), Coca-Cola (KO), Altria (MO), Motorola Solutions (MSI), Northrop Grumman (NOC), Novartis (NVS), Omega Healthcare Investors (OHI), Procter & Gamble (PG), ResMed (RMD), iShares 1-3 Year Treasury Bond Fund (SHY), Vanguard Short-Term Inflation-Protected Securities (VTIP), Consumer Staples Select Sector SPDR Fund (XLP), and Utilities Select Sector SPDR Fund (XLU). A quick housekeeping note before the mailbag... Ten Stock Trader editor Greg Diamond's Diamond Edge series will return next week. Now, in today's mail, feedback on [Dan Ferris' latest Friday essay]( and on [Porter Stansberry's Masters Series essay from Sunday](... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com. "Hey Dan, you da man! You, Porter, Dr. Eifrig, and Corey are my favorites. I have been burned by bear markets before, but the last one was not as bad because I listened to you four. I have tilted towards value stocks the last four years. Loved the comment about BS marketing on the 'bull side' of the mega bubble. We must always remember the first word of the acronym BS is Bull. Is that why it's called a 'bull' market?" – Subscriber Larry N. "Thank you so much for this understandable and very useful information. It will help so many people. Well done!!!!" – Subscriber Merylin M. All the best, Corey McLaughlin Baltimore, Maryland August 5, 2024 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open stock positions across all Stansberry Research portfolios. Returns represent the total return from the initial recommendation. Investment Buy Date Return Publication Analyst MSFT Microsoft 11/11/10 1,351.3% Retirement Millionaire Doc MSFT Microsoft 02/10/12 1,299.5% Stansberry's Investment Advisory Porter ADP Automatic Data Processing 10/09/08 954.7% Extreme Value Ferris WRB W.R. Berkley 03/16/12 761.4% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 659.5% Retirement Millionaire Doc HSY Hershey 12/07/07 492.1% Stansberry's Investment Advisory Porter AFG American Financial 10/12/12 448.6% Stansberry's Investment Advisory Porter TT Trane Technologies 04/12/18 410.6% Retirement Millionaire Doc NVO Novo Nordisk 12/05/19 361.3% Stansberry's Investment Advisory Gula TTD The Trade Desk 10/17/19 338.3% Stansberry Innovations Report Engel Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio. --------------------------------------------------------------- Top 10 Totals 5 Stansberry's Investment Advisory Porter/Gula 3 Retirement Millionaire Doc 1 Extreme Value Ferris 1 Stansberry Innovations Report Engel --------------------------------------------------------------- Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio Investment Buy Date Return Publication Analyst wstETH Wrapped Staked Ethereum 12/07/18 2,291.8% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 1,533.9% Crypto Capital Wade ONE/USD Harmony 12/16/19 1,129.1% Crypto Capital Wade MATIC/USD Polygon 02/25/21 744.7% Crypto Capital Wade AGI/USD Delysium AI 01/16/24 286.7% Crypto Capital Wade Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio. --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Nvidia^* NVDA 5.96 years 1,466% Venture Tech. Lashmet Microsoft^ MSFT 12.74 years 1,185% Retirement Millionaire Doc Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Nvidia^* NVDA 4.12 years 777% Venture Tech. Lashmet Intellia Therapeutics NTLA 1.95 years 775% Amer. Moonshots Root Rite Aid 8.5% bond 4.97 years 773% True Income Williams PNC Warrants PNC-WS 6.16 years 706% True Wealth Systems Sjuggerud Maxar Technologies^ MAXR 1.90 years 691% Venture Tech. Lashmet Silvergate Capital SI 1.95 years 681% Amer. Moonshots Root ^ These gains occurred with a partial position in the respective stocks. * The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%. --------------------------------------------------------------- Stansberry Research Crypto Hall of Fame Top 5 highest-returning closed positions in the Crypto Capital model portfolio Investment Symbol Duration Gain Publication Analyst Band Protocol BAND/USD 0.31 years 1,169% Crypto Capital Wade Terra LUNA/USD 0.41 years 1,166% Crypto Capital Wade Polymesh POLYX/USD 3.84 years 1,157% Crypto Capital Wade Frontier FRONT/USD 0.09 years 979% Crypto Capital Wade Binance Coin BNB/USD 1.78 years 963% Crypto Capital Wade You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. Stansberry Research welcomes comments or suggestions at feedback@stansberryresearch.com. This address is for feedback only. 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