Date: September 14, 2022

Stocks Collapse, Bottom Not In & Fox Business Calls

First, I am super excited to join my friend and the most dapper man on TV, Charles Payne, on Fox Business between 2 & 3pm today discussing the mini-crash, what lies ahead and where opportunities lie for investors.

Well, well, well as my daughter used to say all the time as a toddler when trying to explain herself out of something. Tuesday was certainly an interesting day. The Consumer Price Index didn’t cooperate as so many pundits had predicted. And the stock market fell sharply as almost no one predicted. Please, please, please, if you only learn or remember one single thing from my posts, it should be to watch market reaction over the actual news. The CPI data was absolutely not priced in nor expected.

While it was very nice of President Biden to tell Americans he isn’t worried about the August report, he also doesn’t fill up his car with gas, put food on the table for his family or pay rent to his landlord. I don’t know why presidents make obtuse comments that make them seem tone deaf. Biden does it. Trump did it. Obama did it. And so on. It’s all very frustrating. Inflation has been a growing problem and concern since I started warning about it in August 2020. Granted, I haven’t gotten it all right. I thought inflation would peak by the March 2022 report and head lower. I am still waiting for it to go down. It has been stubborn, but I really do believe help is on the way.

On Tuesday the market was caught completely off guard. One of my morning reads has this absurd conspiracy that Wall Street actually ran up the stock market into the number so they could profit on the way down. Huh? If they ran up stocks, that would mean they bought the whole way up. I saw a pundit on Twitter argue that the inflation number is being kept high for political reasons. Where do these people get their data?

Tuesday was the ugliest of ugly days. A 4-5% drubbing with 99% of the volume in the S&P 500 coming from stocks going lower on the day. Every single NASDAQ 100 stock was down on the day. Apple lost an unfathomable $150 billion of value in one single day. That doesn’t happen all that often.

And with other outsized down days, it is rarely the final bottom. Yes, stocks can and should bounce very shortly. As I have said all year, I do not expect a 2008 or 2002 event or even a mirror of what we saw in the first half of 2022. Behavior like this is often seen as markets try to hammer in a long-term bottom. And I do not share the becoming popular opinion that S&P 3000 (currently 3950) is coming soon.

For a while I have been warning of the risk into October and published a few studies explaining this. Nothing has changed. The top scenario has the stock market bottoming next month and rallying sharply into 2023. The bottom could be above or slightly below the June lows. There are reasonable precedents for both although a higher low would be more difficult to deftly maneuver in real time. That occurred in 1994 and kinda, sorta in 2003. We shall cross that bridge when we get there.

I always enjoy hearing from clients and other folks, especially when markets are tumultuous like now. Should I add money? Should I withdraw money? Should I do something different? My feelings haven’t changed in my 32 years in the business. If your own risk tolerance hasn’t changed then the best plan is to stick with your allocation but dial down and look at the strategies within that allocation. If any market drop is negatively impacting you to the point at which your quality of life changes, then you clearly have too much risk.

If you have cash on the sideline that isn’t in your emergency fund and can or will be earmarked for the markets, I would be ready to deploy that in the next 2-4 weeks. If you own assets like the dollar which have gone straight up this year, I would begin to peel back the exposure to deploy elsewhere. In short, the most successful investors play the odds. When something with a strong track record hits some potholes or has a poor period, that’s when to dive in. Conversely, when an asset or strategy has an unusually strong period, that’s an opportune time to reduce exposure.

I can’t tell you how many Twitter fights I have had with the crypto cult. On the way up, they all beat their chest and tell everyone it’s the new global currency for untold riches. It’s a hedge against inflation, they say. It’s a hedge against falling stock prices. They laugh at older people who don’t get it and ostracize those who own stocks and gold. Amazingly, they continued to pile in the higher crypto went, only to have their highest exposure literally right at the top of the market. And then the crypto market collapsed, leaving so many investors holding the bag. Sound familiar? It was the same story during the Dotcom Bubble.

On Monday we bought levered inverse NDX, QQQ and high yield funds. We sold levered NDX, levered Russell 2000 and IVE. On Tuesday we bought levered NDX and levered Russell 2000. We sold EMB, GDX, NOV, levered inverse S&P 500, levered inverse NDX and some EWZ


Paul Schatz, President, Heritage Capital