How low will this market go?

It seemed like the bottom was falling out of the stock market Thursday, a day after the Federal Reserve (Fed) announced plans to raise benchmark interest rates by 75 basis points.

This followed the Consumer Price Index (CPI) report Friday showing inflation holding at 40-year record levels and the U.S. Producer Price Index (PPI) on Tuesday showing more inflation across the board.

While they are adapting to this environment, Simpler’s traders don’t expect this volatile stock market to end anytime soon and overall expectations are to prepare for more downside pressure.

(Check out the free video, above, for insight into trading this changing market.)

Stock market falls with no bottom in sight

The rash dash to the downside on Thursday showed traders the stock market had not settled into a bottom for this bear market.

“Once PPI and CPI came out, it was obvious the economy was in worse shape than even the Fed was acknowledging,” said Bruce Marshall, Senior Director of Options and Income Trading at Simpler Trading. “We knew they were painted into a corner.” (Bruce delivers his trading insights in the Simpler Options online chatroom and through his B.I.A.S. membership.)

The CPI measures consumer costs for important staples such as housing, gasoline, utilities, and food. The PPI tracks the change in wholesale cost – the price of goods sold by manufacturers. These rising wholesale prices bleed through to higher costs for consumers.

The CPI and PPI are key indicators of inflation.

The CPI and PPI negative economic reports arrived before the Fed announced on Wednesday the scheduled .75% interest rate hike. This is the largest single rate hike since 1994, and the Fed maintains there will be more rate hikes through the end of the year.

The Fed plans to keep up this aggressive action in an effort to combat inflation – the annual rate in May was 8.6% – which is now at the highest level since 1981.

Continued negative economic data has spurred more intense calls that a recession is underway or will hit consumers and the economy more quickly than estimated. Often a recession is not officially “called” until after economic reports show two consecutive quarters of negative growth in the gross domestic product (GDP).

The stock market was hit hard on Thursday.

At one point in mid-afternoon trading, the Dow was down 924 points and the Nasdaq dropped by 500 points.

The Dow closed below 30,000 for the first time since November, 2020. The Dow hit 29,927.07 points to fall 2.42% (dropping 741.46 points at the close). The Nasdaq dropped to 10,646.10 points for a 4.08% tumble while the S&P 500 crumbled 3.25% to 3,666.77 points.

“We already know inflation is hurting people,” Bruce said. “It’s just been bad all year long.”

Repeated negative economic data throws cold water all across the economy, including the housing market. Analysts are warning the booming housing sector could be slowing to cautionary levels.

The housing market isn’t just “sticks and bricks.” This important sector includes workers in construction, transportation, mortgage financing, sales, and more.

“We don’t know if all will get ‘terribly bad,’ but the dominoes may continue to fall in that direction with rising interest rates, inflation, job losses, etc.,” said Bruce.

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Concerns, questions spur ‘economic update’

With so much negative news swirling about the economy and the stock market, how can traders manage the ongoing angst?

At Simpler Trading our team of traders believe firmly in taking a step back as needed when the world appears in chaos. That includes taking a look at other perspectives on what is happening.

John Carter, Founder of Simpler Trading and best-selling author of Mastering The Trade, regularly steps in when market conditions go awry and relays how he views trading.

His goal is to provide other traders a positive perspective on not just trading, but living life. Check out this “quick economic update” from John:

“I’m hearing a lot of questions and concerns, and it’s about time for a general update,” John shared.

“Yes, we have inflation. No, we aren’t going to go into a steep recession.

“Why?

“A recession happens when we have: falling production, falling sales, falling income, and falling employment over more than two quarters. And, there has never been a recession in post-war history that did not see the unemployment rate rise at least 2 full percentage points.

“It’s not just about the GDP, which is the only thing the news focuses on.

“High inflation at this point is off-setting income gains, which is what happens when an economy has been pushed beyond its capacity.

“I’m not saying this is easy or fun. This is just not anything similar to what we’ve seen in a long time.

“‘But aren’t gold and crypto hedges against inflation?’ some would say. No. I’m a fan of both, but they are really more responsive as hedges against negative real interest rates. We’ll be back in that direction, probably by mid-next year when the Fed (Federal Reserve) will have to start easing again.

“‘What about real estate?’ people say. If you are familiar with the 18.5-year cycle, that’s not set to top out until late 2026.

“If you want more info on this read, “The Secret Life of Real Estate and Banking,” by Phillip J. Anderson. 

“What’s fascinating about the real estate cycle is that it also drives the political cycle. Don’t worry, we go from extreme to tame on a regular basis throughout this cycle.

“Yes, real estate can pause, but it won’t top out until the end of this cycle. Then, like 2008, it will be ugly for a few years and then slowly bottom out and kick off another 18.5-year cycle that will likely be modest compared to this last one.

“I see the same people who were calling for a real estate crash with the covid lockdowns are starting to call for another one – don’t fight the cycle. Yes, some areas got frothy and will pull back. That is normal.

“Right now with stocks near their lows and interest rates near their highs what is happening is a valuation compression for ALL speculative assets, especially technology and including cryptocurrency.

“This can be painful, but it is a necessary reset… and it isn’t over.”

“This isn’t about GDP (gross domestic product). This is a resetting of valuations.

“Is this deliberate? Yes. It’s called the wealth effect.

“When people feel wealthy, they spend more. Killing paper wealth reduces spending, which reduces demand, and eventually eases back inflation to manageable levels.

“Will the Fed and ECB (European Central Bank) be able to do this with the supply chain shortages and war? That is what they are trying to figure out.

“At some point, probably mid-next year, the Fed will likely need to start lowering rates again and going back to easing instead of tightening. Then tech stocks and crypto can rally again.

“But until that happens, valuation compression is the name of the game.

“By the way, all of this isn’t because the Fed has raised rates twice. This is all because we’ve had the fastest fiscal tightening conditions in history. Interest rates, energy, food, other commodities, and the dollar all rising together is very, very rare.

“Any one of those conditions on its own causes fiscal tightening – when it happens all together you get what is happening now, with tech stocks like SHOP down 75% and speculative assets getting revalued as if they were at a slaughterhouse.

“What to do?

“The U.S. Dollar will continue to strengthen. This can be played via the ETF (exchange traded fund) symbol UUP.

“Hard assets benefit from inflation, whether it is real estate, art, very rare coins, etc.

“If you have locked in loans at low rates six months ago, great. Keep them.

“Stocks focused on energy and commodities this year have done great, but they are nearing high valuations at this point.”

John also shared more about his personal endeavors and how he lives no matter the state of the economy or stock market.

“In my view, times like this are about embracing your community. 

“When cash is trash, barter. Get a few chickens. Start a garden. You grow potatoes and they grow tomatoes.

“As a side note, I am very pro growing your own food, being prepared for anything, etc. We have a herd of about 30 cattle in Texas and another 30 in Nebraska. If anyone is interested in grass-fed beef hit me up.

“Note – we don’t plan to eat our kangaroos unless things get dicey. (John rescues various exotic animals and lets them roam his Texas ranch)

“These days, if you don’t have land, you can grow food inside your house with specific equipment.

“One of the smartest people I know sold his house and put an RV on an acre of dirt. Hardly any taxes and very cheap.

“Other friends are starting their own communities, their own schools. Get five people together and chip in and the cost drops drastically. The list goes on and on.

“You don’t have to follow the American dream. You can follow your dream.”

“With that note, I’m off to feed the cows.

“Feel free to leave comments and questions on my social media, or tell me why I’m insane.

“Good trading, all.”

Find a trading mentor for this bear market

If you are looking for a trading mentor who has “been there, done that” then consider getting to know John Carter as he delivers his unique style of trading and strategy with a focus on consistent income results.

John developed the system that brings active retail traders together on a daily basis because he wanted to share his growing pains and successes over the past two decades. Gain access to John’s live-trading sessions, real-time stock alerts, and learning how a professional trader works this volatile bear market. Get started today.

Best traders are those who manage risk

Simpler’s traders have been developing trade strategies for this bear market for months, and have been sharing how they adjust as needed.

“If your trading style isn’t working, find a style that does,” said Bruce. “Learn how to trade volatility.”

Bruce has repeatedly emphasized to Simpler Trading members how he trades volatility.

“Trade small size, be very careful, be selective on trades you take, and have tight stops,” Bruce said.

He encourages traders to take potential gains sooner than later, and not try to hold for maximum profit.

“You have to be super nimble in this market,” Bruce said. “Manage your trades. Stay really on top of trade management – it’s the most critical thing.

“The best traders are the best risk managers. Period.”

Bruce encourages traders to join, or at least try, the various Simpler Trading memberships where the team trades side-by-side in real-time.