Recession Recipe: Which Ingredients Spoil Consumer Confidence and Spending?
In this edition of Cook's Kitchen, I take a look at the stock market bargains created by the rush to discount a recession -- that may never show up.
In the video, I also look at the 7 ingredients and "recipe" scenarios that would be required to shear the linchpin of the US economy -- consumer confidence and spending -- and actually bring about the recession "hurricane" that Jamie Dimon says is coming.
I taped the video Wednesday and we got a great data point this morning from a poll of consumers about their inflation concerns -- especially for gas, groceries, and rent -- and how those might impact other spending decisions.
Most Americans expect inflation to get worse, according to a poll conducted by The Washington Post and George Mason University's Schar School of Policy and Government. The big conclusion in the poll data finds that "Rising prices are leading many to adjust their behavior by bargain-hunting, cutting back on entertainment or putting off planned purchases."
Bargain-Hunting in Stocks
Since I think most recession calls are way premature right now, I'm busy trying to find stock market bargains. One way I do that is by surveying the battlefields of how far indexes and sectors have fallen during the ongoing bear market.
When I looked at relative performance for the SPX, NDX, SOX (Semiconductors), and IGV (Software) at the lows in May, we see 6-month (November saw the most market highs) and peak-to-trough (PTT) damage that looked like this...
SPX:-16% and -20% PTT
NDX:-28% and -31% PTT
SOX:-26% and -32% PTT
IGV:-40% and -42% PTT
Software was the biggest loser precisely because it was also the biggest bubble. What stands out is what you can see when you compare these indexes and key technology sectors to their "price memory."
Price memoryis my term for where the market spent weeks or months consolidating in the past before moving to new highs. These areas are significant because they usually represent both a consolidation of prior gains as well as persistent bull-bear battles during earnings season and/or economic uncertainty.
When the conflicts and doubts are resolved higher, these battlefields have price memory that usually shows up as strong support several quarters or years later during big sell-offs.
By the way, I don't use trend lines because I think they are mathematically absurd. You can see me explain this here...
Trend Lines Are Mathematically Absurd
Price Memory Support in Action
Here are the battle zones where our 4 theaters found support recently...
SPX:3800 was the middle of a big Q1 2021 consolidation between 3750 and 3950
NDX:11,500 was the middle of a really big consolidation in August through November 2020
SOX:2800 was the bottom of its Q1 2021 consolidation in alignment with SPX
IGV:260 took heavyweights like CRM, ADBE, WDAY, DOCU, and ZM all the way back to their pre-pandemic highs of February 2020
In terms of relative strength, Semis held up fantastic compared to Software. And it still surprises me that Software had to fall so hard. But there were a lot IPOs in there like SNOW and DDOG which reversed mercilessly and MDB which plummeted over 60% while Shopify SHOP was eviscerated by over 80%.
Speaking of Shopify, I've been a buyer on the way down and while not pretty, I think it's a bargain here at 6.4 times projected sales growth of 30% next year to $7.7 billion.
My other big software buys include Block SQ and CrowdStrike CRWD. The Square ecosystem for small business remains superior to any other offering out there and as they begin to offer more banking services, I can't imagine why a small business would ever leave.
Regarding the premier endpoint cybersecurity provider CrowdStrike, we bought in the $160s after a solid beat-and-raise earnings report and you can hear my rationale here...
Top Picks: Amazon and CrowdStrike
Finally, my top picks in Semiconductors remain NVIDIA NVDA and Advanced Micro Devices AMD. Here's what I wrote in my recent Zacks Confidential report...
Buy Advanced Micro Devices because the #2 in a "category of 2 (next to NVDA)" is firing on all cylinders as CEO Lisa Su counters every NVDA innovation with her own brand of perfection across hyperscale datacenters, gaming, automation, mobile, and autonomous vehicles -- even as she eats Intel's lunch in sub-10 nanometer architecture for pcs and laptops. But AMD still trades at half the valuation of NVDA -- 6X sales vs. 13X -- while growing sales this year at twice the rate (55% vs. 26%).
Buy NVIDIA because they are the #1 in all areas that AMD is a very close #2, like hyperscale computing, automation, robotics, mobile, IOT/edge, and autonomous vehicles. In fact, the Starship NVDA is the epitome of stellar Software+Hardware stacks that let companies create their own robotics platforms at will. The reason I own them both is that large enterprises like to have "dissimilar redundancy" in datacenters and other automation spheres.
Plus, Jensen Huang and his teams of wizard engineers were already working on the Omniverse before Zuck ever conceived of his Metaverse. And I'm giving you a clue about who will own the emerging era of Quantum Computing where binary bits turn into multi-probability qubits.
Be sure to watch the video to see how you can model your own recession scenario forecaster!
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Advanced Micro Devices, Inc. (AMD) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
Shopify Inc. (SHOP) : Free Stock Analysis Report
Block, Inc. (SQ) : Free Stock Analysis Report
CrowdStrike (CRWD) : Free Stock Analysis Report
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