Preserving Principal Is Key: Markets Perched On Precipice Of Pain

Summary

  • Dare I say - market participants are perched on the precipice of pain as major market pillars begin to crumble.
  • Unfortunately, several calamitous catalysts have emerged to include rampant inflation, Fed policy flip from dovish to hawkish, and supply chain issues.
  • All these hawkish headwinds have led to a major market selloff as fears of a recession and imminent earnings revisions set in.
  • Yet, a lot of damage has already been done. I do see a flicker of light at the end of the tunnel. Nevertheless, I've learned attempting to call bottoms is a futile endeavor.
  • In the following piece I will do my best to distinguish reality from repartee and provide some actionable ideas in the midst of the madness.

Price crash and bear market

24K-Production/iStock via Getty Images

There's a time to make money and a time to not lose money. We're now in a time to not lose money. A time to focus on preserving your principal as even the pillars of the market begin to crumble. The market selloff has become a complete liquidation. Even the safe haven stalwart Apple (AAPL) has cratered 25% year to date.

aapl chart sa

Apple Chart (Seeking Alpha)

Old school Wall Street wisdom says when you see a major market pillar such as Apple begin to crumble, we're on the precipice of pain. In fact, we will have definitively entered bear market territory if the S&P 500 (NYSEARCA:SPY) drops another 10 points and closes at or below $3,837, which would be exactly 20% off its highs, officially ending the bull market.

sp 500

S&P 500 Chart (Seeking Alpha)

The hammering of Walmart (WMT) and Target (TGT) stocks as the companies missed earnings was a dire sign that consumers are beginning to tighten their belts. Furthermore, the Nasdaq (QQQ) already has firmly entered bear market territory, as it's down 30% year to date.

nas chart

NASDAQ Chart (Seeking Alpha)

What's to blame for all this market mayhem? I have boiled it down to three major factors. In the following sections I will give a brief synopsis of each. Let’s get started.

Three major market headwinds

Rampant inflation

Inflation is rampant across the globe, yet especially in the U.S. In fact, we're currently at 40-year highs.

cpi rates

CPI Rate (Tradingeconomics.com)

Inflation is an insidious tax on the public writ large. It crept in stealthily and grew like a weed before anyone had time to notice. The Fed is immeasurably behind the curve at this point. Commodity shortages caused by supply chain issues and a high level of demand for goods and services as the pandemic faded are the primary culprits. Wage inflation due to low unemployment also has fed into the sharp rise in inflation as increased labor expenses are factored into prices as well.

Moreover, even though the above CPI chart shows the rate of inflation may have peaked, economists believe it's likely to remain at elevated levels for quite some time. This has caused the Fed to do a 180 flipping from dovish to hawkish, which does not bode well for the markets. Here's why.

Federal Reserve policy change

The Fed changed its policy on a dime once its realized inflation was not “transitory,” as Chair Powell assured us many times. Nonetheless, once he realized they had it wrong, he unveiled a plan to tighten financial conditions by raising rates and at the fastest pace in decades.

The focus of the Fed is to effectively crush demand. Unfortunately, by crushing demand, stocks of the companies supplying that demand tumble, and tumble they have. The average market multiple has dropped by a third from 21 to 14, presently. Unfortunately, we may not even be close to the bottom just yet. Company earnings revisions have been few and far between. Once companies start to publish lower earnings expectations, you can expect another leg down. Now let's turn our attention to the third and final major issue, supply chain disruptions.

Supply chain disruptions

For the U.S. the COVID pandemic is essentially over, yet not so for China. This has caused a major supply/demand imbalance. Presently, major Chinese port cities have been placed in full lockdowns. A second derivative issue of this is not only is that particular port shut down, but the adjacent ports become overloaded with traffic as ships attempt to reroute to the open ports. Plus, the supply chains were already in disarray from the general “de-globalization” efforts started during the depths of the pandemic. All the while demand for goods and services has remained elevated due to the robust nature of the U.S. housing market even in the face of higher rates, primarily due to a lack of supply.

Furthermore, the war in Ukraine has caused an entirely separate issue for European and U.S. supply chains. Putin’s war on Ukraine has caused supply shocks in several commodities such as crude oil, natural gas, and wheat, as Ukraine is the proverbial breadbasket of the world. This has also inflamed inflation causing the price of groceries and gas to skyrocket. I can tell you from personal experience my grocery and gas bills have doubled. The question now is, will this bear market turn into a full-blown recession? Let’s discuss.

Is a recession looming?

Since the Great Depression there have been 17 bear markets, nine of them eventually leading to a recession. So, it's not a given we're definitively heading into a recession. I have been in business since the early 80s and in the markets since 1994. In 1982, I was in the construction business building apartments complexes when everything essentially stopped on a dime. The liquidity had dried up completely. We didn’t get paid for the last complex we completed. That was a huge lesson learned for me. I ended up joining the U.S. Army’s famed 10th Mountain Division to obtain the money for college. It was a business bloodbath that last for years.

I don’t feel like we are in that bad of shape this time around. The 1970s inflation was much much worse than what we are experiencing now, from my recollection. I feel with the Fed as far behind the curve as they are, the odds favor at the very least a shallow and short recession of some sort. Fed Chair Powell has all but ensured we are in for a hard landing at the very least based on his latest commentary. During times such as these, my primary goal is capital preservation rather than appreciation. Its time to run away and live to fight another day. Let me explain.

Capital preservation over appreciation

I raised cash during the last quarter of 2021 on a majority of my high flyer growth stock picks in my speculative growth portfolio as many of my trailing stops were taken out. Subsequently, I did not choose reenter the positions. I always set up an exit strategy for my speculative growth and momentum trades using a trailing sell limit stop order and a sell limit order at a certain point above at my target profit goal.

On my long-term dividend and income plays in my SWAN income portfolio, I set Buy limit orders at lower levels to increase my yield while lowering my basis. I have deployed some new money into AT&T (T), Ford (F), Verizon (VZ), and Bank of America (BAC) recently. But not a vast amount. I still have plenty of dry powder ready to deploy when it seems the coast is clear. Let’s now discuss what that entails.

When will the coast be clear?

It's funny how it seems as soon as we declare we're in a bear market or recession, it's over. Well, we aren’t quite that lucky this time. Yet, some areas of interest are showing signs of peaking. The following is a list of potential positives as I see them.

  • Inflation looks like it has peaked. Nonetheless, it may remain high for an extended period of time.
  • U.S. port congestion has alleviated. Moreover, there's no longer a trucker shortage according to my trucking contacts at this time.
  • Commodity prices have not fallen, but their rate of increase has diminished.
  • Oil and gas prices should eventually drop as the rig count has recovered and hopefully the Ukraine war ends soon.
  • The price of homes has stabilized rather than the seemingly unstoppable march higher we've endured for the past two years. We have over 5% mortgage rates to thank for this.

So, it’s not all bad news. Now let’s button this piece up.

The Button Up

I want to start off by saying the worst thing you can do is panic and sell out at the bottom. The thing to remember in times of market turmoil is “this to shall pass.” The market has bounced back from every bear market and recession and rallied higher 100% of the time. If I'm concerned about a certain position or portfolio, I will buy puts for protection and/or sell calls for additional income. Many times, I use the weakness to add to my dividend and income positions. My saying is “bad news and buying opportunities go hand in hand.”

Over the years, I’ve learned the exact time I feel like selling out was actually right when I should have doubled down. I have disciplined myself to not get emotional about the decision. I perform additional due diligence at the time and determine if the security is down due to idiosyncratic reasons, or just the baby being thrown out with the bathwater.

To wrap it up, I’d say we're closer to the bottom than the top. It's time to start getting your shopping lists together. I use the drop in the forward price to earnings ratio as my first screen when looking for buying opportunities. Not simply price. The S&P 500 growth stocks that have had the largest percentage drops in forward price to earnings ratios according to my latest screen are AMD (AMD), Qualcomm (QCOM), and Nvidia (NVDA). I also like Apple (AAPL) here for growth. I'm still researching new income prospects, but AT&T, Verizon, Bank of America (dividend growth), and Iron Mountain (IRM) are positions I've already added to. I would buy more Exxon (XOM), but my basis is in the $30s presently with a 10% yield so it would not be accretive for me at this level.

Final Note

The stock market is under pressure as I wrap up this piece. There's a fine art to investing during highly volatile markets such as these. It entails layering into new positions over time to reduce risk. You will want to have plenty of dry powder if the stock your're interested in continues lower. As a Veteran Winter Warrior of the US Army's 10th Mountain Division, the attributes of patience and perseverance were instilled in me, hence my investing motto "patience equals profits." Here's a picture of me hiding out in my snow cave waiting for the storm to blow over.

army

Winter Warrior Training Ft. Drum, NY (Personal)

Take your time and build new positions slowly, dollar cost averaging in. Moreover, use articles such as these as a starting point for your own due diligence before putting your hard-earned money at risk. Those are my thoughts on the matter, I look forward to reading yours.

Your Input Is Required!

The true value of my articles is provided by the prescient remarks from Seeking Alpha members in the comments section below. Do you think we are headed for a recession? Why or why not? Thank you in advance for your participation.

This article was written by

David Alton Clark profile picture
29.03K Followers
Retire wealthy and worry-free with the proven Diversified Cash Flow Method!
I have been a Seeking Alpha Contributor for over a decade. I became a CNBC Contributor in 2015 for having the #1 track record according to stock pick returns. I was also featured in BARRON'S for being the Top Performing Financial Expert according to TipRanks from 2010-15. In 2020, I was named "Blogger of the Decade" on Yahoo Finance for having the best stock picking track record from 2010 to 2020. In addition, I am a currently a licensed REALTOR® in the state of Texas, a former FINRA registered OIl & Gas securities representative, banking industry executive with Citibank, and auditor with EY, a major accounting firm. I received my BBA in Accounting (With Honors) from the University of Texas - San Antonio. 


I am a self-made man and started out my career in the US Army's 10th Mountain Division as a Mountain Infantryman. I am a member of the DAV and a Disabled Veteran. I  have managed my own portfolio for the past 30 years. This includes successfully navigating the 2000 and 2008 bubbles, so I completely understand the full cycle the market can take. People who know me in investing circles call me the "Bubble Surfer" for my ability to preserve capital during times of duress. My professional background has provided me with an intimate knowledge of corporate financial statements and how companies actually make money. This expertise and wisdom is the value I wish to share with you. Here is a profile of me featured in the Globe and Mail detailing my career.


DISCLAIMER: David Alton Clark is not a Registered Investment Advisor or Financial Planner. The Information in his articles and his comments on SeekingAlpha.com or elsewhere to be used as a starting point for your own due diligence. Do your own research and always consult a registered investment Advisor.

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Disclosure: I/we have a beneficial long position in the shares of F, VZ, T, BAC, IRM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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