Are We In a Bear Market? Jarvis Weekly Update

Hello and welcome to this week's Jarvis Weekly Update. I'm your host and director of research here at Left Brain, Brian Dress. This week we're going to cover two main topics. The first is the earnings season that began in earnest this week, and the second is the question that's been on many investors' minds: are we in a bear market? With that, I'm going to welcome in our leader, CEO and Chief Investment Officer at Left Brain, Nolan Langford, to the program. Nolan.

Hey, good evening everyone. Excited to be here talking stocks and markets with you and Brian.

Wonderful, Nolan. Um, well, before we get started, just a couple of quick announcements. Um, you know, the Jarvis Weekly Update on YouTube is just a sampling of the topics that we cover each week in our Jarvis newsletter. So click the description box below if you want to learn more about how you can get that in your inbox every Saturday morning. And then second, beyond the research operation, Left Brain also manages investment portfolios. Look also in that description box below for the link where you can sign up for a no-cost, no-obligation portfolio review. With one of our investment advisors. And, uh, you're actually looking at two of them here. So, um, yeah, definitely take advantage of that offer. With that, we're going to jump right in. Um, as we all know, investors know, it's been a tough week out in Wall Street. And so we want to put some context, uh, on some of the events that we've seen over the last few days. Um, so we'll get started with just a quick market recap for the last few days. Uh, it has been a short week since Monday was a holiday. But out of the last 4 days that we cover in our Jarvis newsletter tomorrow, you know, 3 out of those 4 were negative days for the S&P and the Nasdaq. And then the one that wasn't a negative day, very small update. We'd also point out in our Jarvis ranking, the top 25 stocks in our Jarvis ranking, 19 of those were in the energy space. So that's definitely, you know, one of the leaders in the market today. And, you know, the worst performers are dominated again by, you know, technology. And also consumer discretionary. So that's a pattern we've seen for the last few weeks. And Nolan, uh, any thoughts on kind of the last week of investing and those topics?

Yeah, it kind of continues a trend that we've seen for, for quite some time. Um, it's sort of growing in violence a little bit. Um, you know, initially we started to sell off with, you know, being sort of specific by sectors As interest rates rise and inflation rises, or market prices those in, there's certain sectors that are disadvantaged and certain sectors that are less advantaged. And, uh, it was a lot more discriminating at the beginning, uh, but now here lately it's starting to be more wide-ranging. The market's playing catch-up with those securities that held up over the last several months, sort of. We've been noticing this pattern Well, on the index level, if you look over the last 8, 9 months, the index looks like it had a great year, but a lot of the constituents did not. They've really had a rough go of it the 8, 9 months. And it looks like maybe this is the blow-off top. It looks like the market for a few days here is starting to try to catch its bottom. It went kaput here last couple of days, but we'll be interested to see here over the next week or two um, if some of the selling starts to dry up a little bit. Absolutely.

And Nolan, we're going to start getting some data here with earnings season approaching, and we're going to go right into our first topic. So again, earnings season's approaching. We've had a number of earnings over the last week, mostly in the bank sector. So we saw Bank of America, Morgan Stanley, Goldman Sachs, PNC, and Travelers. And in the financial space. Mixed results there, some good, some bad. We also saw UnitedHealthcare, American Airlines, and then Netflix reports after the bell today, uh, Thursday. And then next week we're going to see quite a bit. So 3M, GE, Johnson Johnson, Microsoft, Boeing, Freeport-MacMoran, Intel, Las Vegas Sands, ServiceNow, Mastercard, Nucor, Sherwin-Williams, Apple, and Caterpillar. So a pretty broad cross-section going to come out next week in terms of earnings. And we, you know, if you followed Left Brain for a while, you know, you know, we really dig deep into the earnings. This is where we really get data on the companies we follow. And so we'll be looking into next week, especially at some of those tech firms. But Nolan, you know, we're looking for a couple of different things. Next week. We're looking for the earnings results themselves and also kind of the way that the market reacts to those earnings. So, um, any— you know, we'd love to hear your thoughts on, uh, what we expect in earnings next week.

Yeah, very exciting time for us as analysts. It's sort of like our playoffs culminating in the Super Bowl or something. And we're not going to have to wait to next week. Here in a few minutes, we get Netflix earnings. For those of you that have followed us for a while, um, we followed Netflix for a very long time. So it'll be very interesting to see here this evening what they report in terms of revenue growth and subscribers. They just announced a price increase. Um, the shares have been somewhat weak here the last few months. It'll be interesting to see how the market responds to it. So maybe that'll be a leading indicator of what to expect next week. But you're right, I'm going to be tuned in. A lot of those names that you mentioned will be top of list for me, and really interested in what the CEOs say not only what they reported last quarter, but what the guidance looks like going forward, what they think of interest rate increases, how they'll be handling those, and like you mentioned, what will happen in terms of stock market reaction. One of the things that we know is, you know, it's really, it's not the analyst upgrades that move stock prices, It's really how much cash they're generating and how business is doing. And so from a fundamental perspective, that's really what we'll be tuned into.

I think it's interesting because last quarter we really saw a lot of these, um, companies report really positive earnings and, and get met with, um, either indifference or selling. And I guess we're going to be looking next week and, and see if that pattern continues. So And that really filters into our second topic. So for topic number 2, we're looking at, uh, are we in a bear market? That's the title of this week's video, and I think it's something that we're all thinking about as investors. First of all, I think we all— we don't necessarily all know, but I think it's a pretty widely known definition of a bear market, and that's, you know, 20%— a market that's 20% below its all-time highs is generally in a bear market. Um, I think that in— at Left Brain, we define it a little bit differently. And I'd like to first of all start out by asking you, Nolan, you know, what are your thoughts on how to define what a bear market is?

Um, so I guess there is a strict definition if you go by the sort of the numerical look at it. Um, you can quantify that by pullback. I guess that's one definition. Um, but we do a lot of looking under the hood. Um, we don't look at a lot of index level. We look at sort of individual businesses to see how they're doing and then how the market reacts and what their stock prices are doing. And, uh, it's felt like this has been a growing bear market here for the last 4 or 5 months. It started in just a sector, but now it looks like the sectors that didn't sell off earlier starting to catch up. So yes, I'm going to go out on a limb and say it feels a lot like to me that we are in a bear market. Part of me wonders, you know, the market has come a long way in the last few years, and I think coming out of COVID people were really surprised. One, not that we had a recession, because the market and the economy, the worldwide economy shut down because it had never done that before. And then we had central banks around the world, particularly our Fed here in the U.S., that stepped up with these emergency measures, and it ended up being the shortest recession we had in history. And then going forward, the market did wonderful, uh, for the next couple of years, and I think it surprised a lot of people. Maybe it got ahead of itself, and it seems like now the market's trying to retrench. Um, it, it all is not awful, but I do think that, uh, it feels a lot like we've sort of gone through a bear market. Whether that'll lead to a recession or not, who knows. And there's certain ways to do very well and to make money, uh, coming out on the other end. Certain things that we're watching have us excited. But yes, Brian, it feels like to me that, um, we are in a bear market.

I agree. And I think, you know, when we talked about this as we got ready for this, this episode, was the sort of cascading effect. So, you know, this, this all started in the technology sector, and as you can see in these charts, IGV and also XLK are pretty good, good signals of that. But, you know, a lot of people started to rotate in 2021 into other sectors that they thought are deemed a little bit safer. So looking at the charts here, XLY, consumer discretionary, over the last month, XLV, the healthcare ETF, and then XLF, the third chart we're going to show you here, the financials. You can see that there's been sort of a cascading effect and selling has, has pushed over to these other sectors. Over the last few weeks. And I guess that what that shows is, you know, investors have tried to rotate to what they deem to be safer sectors for allocation. And what we're really seeing is even those safe sectors are starting to show weakness.

I think you're right. You know, investors are— you know, it's a tough decision. You know, clearly cash, where inflation is, cash is a guaranteed loser. The next safest thing you think about going to is some form of government bond or Treasury bond or high-quality corporate bond, and those have also been losers. And, you know, from there you search for other things like dividend payers or other things, but you have to be careful about value traps and companies that aren't really good businesses. In the end, at some point, the selling will stop. The businesses that will continue to do well are the businesses that are the best businesses. That means that they actually have sales, they actually have profits, they have acceleration. And so once the selling stops, um, this will be really good because then you'll be able to buy the highest quality businesses at a lower price, and they'll continue to compound from where they are at that point. Um, so a lot of— we're busy. We are extraordinarily busy. We'll be more busy over the next few weeks as earnings roll in. And, um, we're sort of very excited to see once this selling stops, um, there'll be some very, very attractive places to put money to work. And it's unbelievable how quick the catch-up can happen once it starts.

So as we face this sort of difficult time in the markets, what are some words of advice you might, um, throw out for investors to deal with, you know, the kind of conditions that we're seeing now?

I think one of the things that we don't want to do is make a mistake. I think the easiest thing to do is stay pat. You know, if you have a portfolio of world-class businesses that are healthy, that are financially strong, good balance sheets, good management, the end markets are strong, revenues are continuing to grow and compound, probably the safest thing to do is to sit still. I think the riskiest thing to do is to sort of trade and to trade a lot. Because as you and I were talking about, Brian, earlier, in bear markets what you do is you get these violent pullbacks and even more violent swings on the upside. So I think, uh, the data shows, uh, the most erratic times in the market history happens during bear markets. So sometime here over the next week we're going to get an unbelievable rally, uh, to the upside, and, and so people will try to chase it, and then you'll get hurt days like today when the market's up. A lot at the beginning of the day and down a lot at the end of the day. The more you trade, the more mistakes you can possibly make. And, um, so I would just caution people that that's probably the worst thing that you can do.

Yeah, so this is probably the time to start studying and looking for what to do when the smoke starts to clear. I think that makes sense. And Nolan pointed out a great point, which was in bear markets you do see some sharp rallies. We saw that happen twice this week and they were met with selling. So Proceed carefully. So that's our two topics we wanted to cover today. We also wanted to give you a little bit of a preview of the newsletter. The Jarvis newsletter covers many more topics than we cover in the YouTube each week. So this week we're going to cover not, not only just the earnings season and the bear market question, but we're also going to cover relative strength that's continuing in Chinese equities. We're going to give you some more thoughts on energies and materials. And also our thoughts on the bank earnings that we studied over the last week. So definitely again, look down at the description below the video here for information on how you can receive the Jarvis newsletter and hear about all those different topics. With that, thanks a lot, Nolan, for being with us. And thanks everyone for showing up.

Have a good week and we look forward to talking to you next week.

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