The circular logic of Wall Street bears makes me want to own more stocks

Published Tue, Apr 25 20231:40 PM EDTUpdated Tue, Apr 25 20234:43 PM EDT

I just got back from Texas, where I caught some of the optimistic fever that greets visitors to the Lone Star State. I know, of course, that anything I picked up there was strictly anecdotal. But it reminded me of something that's been brewing in my head: I'm beginning to believe that I live in the gloom capital of the world. On Wall Street, if things are good, that's bad, because the Federal Reserve will keep raising rates; if things are bad, that's bad because analysts' expectations won't be met. This is positively ridiculous. You can talk yourself into anything bearish with that view. It's a mental trap put out by the bears themselves, and so many of us fall into it unless we leave the vicious vortex and venture to more friendly confines. (Although, admittedly, hanging out in Cowboy country may not be so friendly for me as an Eagle season ticket holder.) Let's examine this mistaken circular reasoning that has captured the minds of so many investors — and, most certainly, traders. First, stocks do not trade on current expectations. If that was the case, many of the stocks of companies that have already reported would be down, not up, and certainly not up substantially. Second, if things do cool — and in many cases, they still haven't — then we will no longer have to fight the Fed. That's something, rarely, if ever, works as we saw from last year's performance. Third, we can only marvel at how things can shift so fast in this market — shift in favor of the bulls, not the bears. So many of the big misses amounted to nothing but buying opportunities as soon as three days later. No reason to exit. Therefore, I look at the market like this: If companies report weaker earnings, they most likely will benefit from a conclusion of the Fed tightening cycle, which I believe will happen this year. If the numbers are sensational, then we are thrilled to own them. We own only a handful of stocks that benefit from an economic slowdown. Those, frankly, are the ones I am most circumspect about, because they may have moved too much out of safety concerns that have proven relatively unfounded. Tuesday's market is a little off this message, reacting to the nearly 30% decline in shares of First Republic (FRC), a challenged bank suffering from a deposit run since the fallout from last month's collapse of Silicon Valley Bank. No bank has ever survived losing more than half of its deposits, and First Republic in the first quarter was close, with 40% out the door . So anything that's down on this mini crisis — and, I would say that's pretty much the entire market — might be a buying opportunity and not a reason to flee. Keep in mind that every company that reported earnings Tuesday is in some way impacted as people fear the worst. We don't. That's the big issue Tuesday, and it could be with us over the next few days. First Republic may be doomed, but we see no systemic risk. It's too small. With that in mind, let's talk about the biggest issues: supply, demand and inflation. You may watch "Mad Money" interviews, which can be informative about all sorts of matters and industries. What you don't see is my behind-the-scenes, off-the-record chats with many a CEO, including those who come on the show. I am hearing two things: Inflation is still a major factor in their companies' results; but it is, at last, starting to cycle through and will be less of a factor later in the year. Only those with severe labor problems brought on by early retirement because of Covid are still struggling, even as they attempt to pass on those costs to consumers. Supply chains, materials even unskilled labor issues have largely been resolved. Still, that doesn't equal the rollbacks that I know the Fed needs to stop the tightening. For that, I expect the troubles of the regional banks, and I'm talking about much more than just First Republic, to play a deflationary role. One look at First Republic's Q1 numbers after the close Monday tells you that there's no way the financial examiners are going to allow anywhere near the velocity of loans made before the mini-crisis. We already had a ratchet back of commercial real estate — it's a veritable curse word on these conference calls. But now we have one bank after another discussing not loan growth but preservation of capital. No dividend boosts, no buybacks, just pride in sticky deposits and having them stay sticky. These banks make basic loans to companies that want to expand and to people who want to buy cars or refurbish homes. Those will slip and with them will come lower auto sales and lower home sales, although the latter has not yet occurred. Autos have been too hot. They will cool and with it will come the end of the big markup in new vehicles that the Fed data flagged throughout the country as well as a collapse in used car sales. Homes are trickier. We have a tremendous shortage of homes almost nationwide. Only a large round of layoffs will change that. Until Silicon Valley Bank failed last month, I couldn't figure out how we could get layoffs other than in companies that over-hired because of Covid, mostly in tech. But the bleaker regional banking picture will produce layoffs that will reverberate throughout the white-collar and industrial economies. A sudden influx of immigrants looking for work, suggested to be as high as 630,000, will be more than the last four years combined, and I think there will be a steady supply of workers eager for minimum wages. It's not going to be a perfect rollback. Rents, so big in the Fed's thinking, are going the wrong way and will continue to do so unless homes become so affordable that people can make the move. Travel is on a ridiculous trajectory of ever-higher hotel rates and airline prices as they rush to cash in on the "long on money, short on time moment." Bottom line Sure, something can always come out of left field. People have been shocked by First Republic outflows. But, again, I don't see any systemic risk. I think the 10 days leading up to the debt ceiling deal will be tense, and a default can't be taken off the table although we will know who will be blamed for Social Security and Medicare by the time we get near the ( early June ) deadline. We are close enough to a presidential election that neither party wants to risk being the bad guy for more than a day or two. I could be wrong about a spike in inflation coming from energy which has been tame of late. Although the Fed would do well to revise the impact of lower natural gas prices and accentuate them over lower prices at the pump. If they did, we would think inflation is less of a problem when it comes to aggregate figures. To me that's a green light for owning a lot of high-quality stocks with a smaller cash position in the Club portfolio than usual, meeting these intraday selloffs by buying when we can and when we have to if the fundamentals warrant. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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