How To Respond To A “Bend-But-Don’t-Break” Market

If you’re a football fan, then you’ve probably heard someone refer to a team with a “bend-but-don’t-break” defense.

They might surrender some yardage and get pushed backward at times. But when their back is up against the wall, they stand their ground and push back… refusing to let the opponent cross the goal line.

Sure, you’d prefer a defense that never gives up a single yard. But that’s unrealistic. Many times, the best you can hope for is that your team doesn’t give up any big plays.

The market bulls played that role perfectly as we closed out September. The bears seemed to be beating them into submission, pummeling the major indexes on September 14, 16, and 17 with a relentless attack. And then on September 20, an overwhelming assault of selling pressure left the Dow reeling nearly 1,000 points before it could recover.

The sellers had all the momentum on their side. News broke that Evergrande, one of China’s largest property developers, was on the verge of defaulting on its loans and possibly even toppling into insolvency. The fallout from that massive ($300+ billion) implosion would engulf dozens of other lenders and investors around the globe, possibly triggering another financial crash.

While most of Evergrande’s holdings are in Asia, American firms like Blackrock have considerable exposure to this shaky debt. The fact that this potential catastrophe fell on the 13th anniversary of the collapse of Lehman Brothers did nothing to lighten the mood. The parallels are eerily similar.

Meanwhile, traders also had to digest the impact of the Federal Reserve announcement that it will begin tapering asset purchases, as well as possibly tightening rates sooner than expected, to counter the ominous threat of inflation.

And if that weren’t enough, a contentious, high-stakes debate in Congress regarding the debt ceiling has also had traders on edge. Without acting, Uncle Sam could run out of money to pay bills as soon as October 18, according to Treasury Secretary Yellen.

Any one of these three wildcards could easily send the market into a deep tailspin, possibly even a full-fledged correction. But all three hitting simultaneously? Well, you can see why the bears have been in control lately. But in the last full week of September, just when it looked like stocks were headed for another rout, the market managed to dig in its heels and fight — ending on a three-day winning streak.

It’s reassuring to see buyers confidently taking advantage of market dips. But don’t think the bears are throwing in the towel just yet. In fact, we just saw another painful chunk of market yardage taken away last week. All told, we ended the month of September down by about 4.8% on the S&P 500. That snapped a seven-month winning streak.

Rising prices continue to pose a real threat. Throw in the possibility of a systemic financial infection and perhaps a test of the very meaning of the “full faith and credit” of the U.S. government, and you can understand why I am cautious right now.

Inflation Worries Strike Again…

Meanwhile, inflation continues to be a persistent threat. On Friday, the Bureau of Economic Analysis reported that the personal consumption expenditures price index (PCE) jumped in August at the fastest pace in 30 years.

Even Fed Chair Jerome Powell admitted that he is “frustrated” by supply chain bottlenecks “holding up inflation longer than we had thought.”

Personally, I’ve never seen this many large American businesses complaining about the impact of inflationary pressures. Not just on raw materials, but also labor and transportation costs.

While third-quarter earnings are generally tracking in the right direction, at least 225 corporate execs mentioned inflation in their most recent conference calls. That’s nearly half of the S&P 500 — the highest percentage in over a decade. The industrials segment seems to be the most concerned, followed by consumer discretionary.

As I reported a few weeks ago, the Producer Price Index (which measures prices at the wholesale level) just logged a red-hot 8.3% increase in August. That sets a new record for the fifth straight month. Up until recently, the Fed and the Biden administration would have you believe this unprecedented inflation spurt is temporary and will soon abate. But I never bought it.

Now, Powell has conceded that the “effects have been larger and longer-lasting than anticipated.” And I’m starting to see fewer and fewer instances of the term “transitory.”

Here’s what I am seeing…

“Our prices are going to go up for the remainder of the year as we see inflation going up. Cost inflation, labor constraints represent new normal”
General Mills Chief Executive Jeff Harmening

“We are seeing some increasing cost flows starting to flow through in grocery. Kroger is passing along higher costs to the consumer where it makes sense to do so.”
Kroger CEO Gary Millerchip

“Our pricing is strengthening every day. It’s pretty breathtaking actually.”
Ford CEO Jim Farley

I could include about 220 more of these corporate testimonials, but they start to sound repetitive after a while. Raw materials and other inputs are getting more expensive, and companies are passing that rising cost along to shoppers like you and me whenever possible to maintain margins. It’s not complicated.

What You Can Do Right Now…

That’s why I’ve been transitioning my portfolio to prepare for this type of environment. Bend, but don’t break. Don’t give up any big plays.

Commodities are already proving to be a key beneficiary, and I expect that to continue. Industrial metals like copper and zinc. Forest products such as lumber. Grain and other agricultural products. Construction aggregates like cement. You name it.

Did you know that corn prices have surged more than 50% this year? Or that natural gas has rallied 99% to a seven-year peak?

If inflation continues to heat up (eroding the value of your dollars), then my advice is to keep at least a small portion of your investable assets in hard assets. And over at my premium High-Yield Investing service, I’m deploying protective stop losses to nail down profits on some of our hard-won gains.

You may be wise to do the same. In the meantime, my latest report can help you weather whatever the market has to throw at us next…

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