70% Of The Time

Stocks opened mixed today with plenty of volatility. The S&P 500 Index is now down about 20% from its January 3rd all-time high. Weirdly, consumer discretionary stocks (i.e. Netflix, Amazon, Target) are up 2-4% in early trading. But most everything else is in the red. The VIX fear gauge is hovering around 33—elevated but not panicky. Commodities are trading most lower, including gold. And the bond market is mixed. We’re by now used to bond yields marching higher in step with inflation and Fed interest rates. But over the last couple of sessions the 10-year Treasury Note yield has fallen back to 2.84% from 3.1%. Does this signal a peak in inflation? If so, this should relieve some pressure on the stock market. If, however, it signals fear of recession in the immediate future, it won’t be good for stocks.

Disney (DIS) reported mixed first quarter results and the stock is down 1% this morning. Traditional TV and media distribution revenue sagged. But the quarter’s highlight was explosive growth at theme parks. The parks business is 50% more profitable than it was a year ago and higher prices have not dissuaded consumers. In addition, Disney+ attracted nearly 138 million new subscribers, which was better than anticipated. And average revenue per user grew 5%, presumably due to a price increase. But management said the company may not be able to maintain that momentum over the balance of the year. That seems like a prudent qualifier in a market like this. The stock is down 51% from its peak in early 2021—all the way back down to where it traded in early 2015. And yet Wall Street analysts are predicting double-digit revenue growth this year and next, with steadily improving profit margins. So there’s a huge disconnect here.

Apple (AAPL) stock has held up very well during this stock market correction…until yesterday’s open. Since then it’s down 7.5% (and -22% from its January peak). The financial news media quickly pounced on the stock, taunting that It has been “dethroned as the world’s most valuable company”; crying that it’s no longer “safe” for investors! Is any investment every really safe from downside? Should we expect that this most loved company shouldn’t ever see volatility? Of course not. But Is it time to nail the coffin shut and go cry in a corner? No. Just like Disney, this is a high-quality, well-run company with compelling products. It will weather the storm.

Speaking of the storm (and the disconnect I mentioned above), it seems like the stock market is pricing in the strong possibility of a recession. Nuveen’s chief investment strategist says investors might be “resigned to a bear market.” Certainly, the mood seems overly pessimistic and day-to-day trading is driven by emotion (fear) rather than fundamentals. I’ll never forget Rich Bernstein’s three phases of emotional response to bear markets: it’s temporary, it’s worse than we expected, it will never end. Once we reach the third phase, a market usually bottoms. Fundstrat’s Tom Lee identifies 16 separate volatility events since 1940 in which the stock market fell 16% in less than four months. That’s considered a very rapid decline. During 12 of the 16 events, the market was higher six months hence. And I guess that’s what you would expect given the fact that history tells us the market goes up about 70% of the time.