- GRIT
- Posts
- 🔥 Hold on Tight...
🔥 Hold on Tight...
Volatility is everywhere...
This piece will be on the shorter side — as critical information is still developing.
With that being said, I take pride in being able to always share actionable insights with my subscribers as quickly as possible, especially as volatility runs through our portfolios.
⚡ A Few Observations
To set the stage, here’s where we’re at…
Last week, the S&P 500 Index broke its 356-day streak of low volatility. Specifically, we hadn’t experienced a -2% single-day drop in price in nearly an entire calendar year — until last week. As you can see above, after these streaks are finally broken we have trouble starting new streak for several months.
This means volatility should be expected and positioned for.
Additionally, it’s earnings season — as if there wasn’t enough volatility in the markets already! This earnings season we’re learning a lot about what these Megacap technology stocks are expecting from an earnings growth perspective for both the rest of the year and calendar year 2025.
As you can see above, Megacap technology stocks (Microsoft, Nvidia, Amazon, Google, and Meta) experienced some insane earnings growth during 2023 (+57%). Wall Street is expecting this earnings growth to slow to +37% in 2024, and decelerate ever further to +19% in 2025.
As if Wall Street had a crystal ball for multiple years into the future (they don’t) they’re also expecting earnings growth to decelerate even more in 2026 (+13%).
Earnings growth deceleration is not exactly a bullish fundamental characteristic. However, what’s more telling is how the median S&P 500 company’s earnings growth is trending during the same period of time… up!
2022 was a tough year for the median S&P 500 company — rampant inflation, interest rate hikes, etc. This all caused the median S&P 500 company to report lower-than-expected earnings, forcing the S&P 500 Index to contract by -20% during the 12-month period.
Then Megacap technology stocks took the reigns, and every investor began piling their money into what was classified by many as a “safe haven.” This classification came not only because they were well-established companies, but also because they had hundreds of billions of cash on their balance sheets — which means they weren’t being negatively impacted by higher interest rates.
They could use cash to acquire companies, they didn’t need to take on debt for CapEx investment, didn’t need to issue bonds at competitive rates, etc.
AI of course had a positive impact on their earnings as well, especially Nvidia.
Looking back toward that earnings illustration — you see what Wall Street is expecting for 2026? Both earnings deceleration in Megacap technology stocks and the median S&P 500 company. A double whammy.
If those estimates turn into reality, 2025 is going to be a bumpy year (because the stock market is forward looking) as earnings growth would be decelerating on both fronts.
Now let’s talk about what’s going on right now — not next year.
The “Sahm Rule” is a recession indicator created and named after Claudia Sahm, a macroeconomist who worked at the Federal Reserve and the White House Council of Economic Advisers.
According to the Sahm Rule, the early stages of a recession is signaled when the three-month moving average of the US unemployment rate is half a percentage point (0.5%) or more above the lowest three-month moving average unemployment rate over the previous 12-months.
Now with the unemployment rate at 4.3%, the Sahm Rule has officially gone into effect.
The Sahm Rule is widely recognized for its accuracy, simplicity, and ability to quickly predict the onset of an economic recession. Below you can see a table that shares the specific dates the Sahm Rule was triggered, what the unemployment rate was, and then when a recession officially started after it was triggered.
In some instances, a recession didn’t start for another 8-months. In other instances, a recession started as soon as 30-60 days later. Now that the Sahm Rule has been triggered, we have no idea how long until an official recession is announced.
However, other data points are pointing to a recession — including the ISM jobs subindex. This index (in yellow) plummeted from 49.3 to 43.4 — lower than it was pre-Covid. This 43.4 reading is even lower than the 45.4 recorded in September 2008 when Lehman Brothers collapsed.
The only times we’ve seen this figure lower than where it stands today were 1) the Dot Com Bubble and 2) the Great Financial Crisis.
The data is telling us a recession is looming!
In my opinion, the recent volatility we’ve seen is the market becoming more and more worried that the Fed is behind the curve on rate cuts — and is allowing the economy to officially fall into a recession before stimulating with cuts.
So what happens now?
The above chart does a great job illustrating what we could expect to see from the S&P 500 over the next 18-24 months. It’s very simple — if we experience an official economic recession (data suggests we will), expect the stock market to trade down -15% to -20% before recovering back to “zero” in 2026.
If we do not experience a recession, expect the S&P 500 to trend higher (+30% to +40%) over the next 18-24 months.
⚡ Some Ideas
If you’re afraid of the S&P 500 contracting -20% from current levels and want to flip to cash as a speculative maneuver, be my guest. Feel free to also park some of that cash into CSHI as it will pay 5.5% on your cash over the next 12-months.
Personally, I’m young. I have decades of investing ahead of me so I have every intention of riding the wave and dollar cost averaging into fundamentally sound companies throughout this looming recession.
Here’s the deal though — despite Megacap tech earnings expected to decelerate, the median S&P 500 earnings are expected to accelerate. This is a very good thing for the Dividend Growth Portfolio, as these names are all categorized as “median S&P 500 companies.”
For example, Kroger is up +19.4% YTD as of writing this.
Tractor Supply Company is up +15.5% YTD, Verizon is up +13.7% YTD, and W.W. Grainger is up +13.4% YTD. I have no idea how any single company might perform over the coming quarters if the US economy enters a recession — but these companies theoretically are positioned for success into 2025.
I, of course, remain bullish on Megacap technology stocks like Google, Amazon, Microsoft, and others. However, as hedge funds and other investors rotate out of them and into “the median S&P 500” in anticipation for earnings acceleration in 2025 — I’ll also be benefitting.
👉 Gold
Above is an interesting chart that illustrates the price of Gold between rate hikes by the Fed — insinuating Gold will continue to trend much higher over the coming 18-36 months. I’ll probably be adding some Gold exposure via GLD to my portfolio sooner rather than later to hopefully take advantage of this trend.
👉 Cryptocurrency (Bitcoin)
Cryptocurrency is a mixed bag at the moment — on one side of the aisle, Bitcoin Dominance is headed toward new cycle highs, a good thing for the price of Bitcoin. We’re also exactly where “we’re supposed to be” when it comes to return-on-investment for Bitcoin during this recent cycle (green line).
Whereas on the other side of the aisle, Bitcoin is the definition of a “risk asset,” which means the moment uncertainty begins to take shape in our economy investors begin selling their riskiest investments first — i.e. Bitcoin.
I’ll continue to buy Bitcoin and I’m still optimistic we’ll see $120K by the end of 2025.
👉 Income-Focused
A great way to offset losses in price is by gains via income — this is why I hold so much SPYI and QQQI. Not only do these ETFs aim to track the total performance of the S&P 500 and Nasdaq-100, they deliver consistent income to my portfolio of 1% per month.
By holdings SPYI over the next 12-months, I’ll realize a +12% gain via income. If the S&P 500 trades down by -15%, theoretically I’ll only be net negative -3% when it comes to SPYI because its income offsets its price-based losses.
Here’s a link to an analysis I wrote about JEPI, XYLD, SPYI, and ISPY for my Seeking Alpha followers. Give it a read!
⚡ Other Information Worth Sharing
The Atlanta Fed is forecasting Q2 GDP growth of +2.5% — if this is true, maybe these recessionary fears are overblown?
The Leading Employment Index started contracting in September of 2022, four months before the bottom of the unemployment rate. Despite this cycle moving slower than normal, the broad basket of Leading Indicators never really changed their tune.
There’s always going to be data suggesting contradictory things — it’s up to us as investors to know how to position our portfolios for long-term success. I hope this article helped you figure out how to do that effectively.
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
Reply