What if you were waiting for a recession that never arrived… The signs are all there. But it never shows up.
It sounds a lot like the plot from Samuel Beckett’s classic play, Waiting for Godot.
In the play, the two main characters spend their entire time waiting for the mysterious Godot to appear. But he never does.
Like the play, the economy continues to send signs of something coming that has yet to arrive. In the case of the economy, it’s a recession instead of Godot.
(A recession is generally considered two consecutive quarters of negative gross domestic product [GDP] growth. The last U.S. recession was in 2020.)
For example, last week big retailers like Walmart, Target, and Home Depot announced their earning results. They reported U.S. consumers are increasingly holding off on big-ticket purchases and trading down for lower-priced products.
The University of Michigan Consumer Sentiment Index dropped to a reading of 57.5 in May. That’s a six-month low, and only a few points above the low of 55.3 recorded in the depths of the 2008 Great Financial Crisis.
Additionally, U.S. small business confidence fell to a more than 10-year low in April. This was largely due to concerns over finding workers and expectations that sales would decrease.
According to economists at Bank of America and UBS, weaker consumer spending and a pullback in small business expansion could help kick off a recession as early as this summer.
Despite all these ominous signs, we’re still waiting for a recession to arrive. Meanwhile, the U.S. economy continues to show strength in some areas.
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Auto sales picked up in April, rising to an annualized rate of 15.9 million cars. That’s the highest rate in over two years.
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Retail sales, when excluding car and gasoline sales, came in significantly hotter than expected, growing 0.6% in April relative to March.
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Average hourly earnings grew by 0.5% in April, its fastest monthly growth rate in over a year. Even when accounting for inflation, wages rose by 0.1%. That strengthens consumers’ spending power.
This economic data is so strong, the Atlanta Federal Reserve revised its GDP estimate upward.
It now expects real GDP – the value of the goods and services produced in the U.S., adjusted for inflation – to grow by 2.9% in the second quarter relative to the same quarter last year.
That’s a sharp rise from the 1.7% growth the Atlanta Fed was forecasting on May 1. In dollar terms, that translates to an increase of $577 billion in goods and services produced in the U.S.
So do we know if and when a recession will happen? No, we don’t.
But unlike the characters in Waiting for Godot, at the Daily, we’re not paralyzed by uncertainty.
Today, I’ll show you a strategy to profit from the market – regardless of a recession. And a unique indicator that’s telling us why now is a great time to strike…
This Indicator Suggests a Short-Term Bounce in Stocks
Even if a recession doesn’t appear in the near term, we do expect volatility to rise as the summer goes on.
That’s because the federal government is expected to hit its debt ceiling on June 1.
The debt ceiling is the statutory limit on the amount of debt the U.S. Treasury can have outstanding to pay its current obligations.
Talks between House Republicans and the Biden administration to raise the debt ceiling are ongoing. And it’s possible they won’t reach a deal by the June 1 deadline when the U.S. can no longer pay its bills if the debt ceiling isn’t raised.
If the U.S. fails to raise the debt ceiling, the government would be forced to default on some of its short-term debt obligations. That would lead to a downgrade in the U.S. government’s credit rating. As a result, borrowing costs would spike.
According to Moody’s, even a short-term breach of the debt limit could cause the loss of nearly 2 million jobs and the unemployment rate to surge to 5%.
So we must prepare for the possibility that negotiations extend into the summer.
As I wrote last week, investors are still forecasting the Fed will cut interest rates in the next few months.
According to the CME Fed Watch Tool, investors are pricing in a 20% chance that the Fed cuts interest rates by September and a 60% chance of a cut by November.
That puts them at odds with six of the 12 Federal Reserve governors who have made speeches over the past week.
They each expressed doubts that rate cuts were appropriate at a time when a decrease in the inflation rate has stalled… and the job market remains tight.
As investors reset their expectations about a pivot to rate cuts, expect volatility to trend higher.
In the meantime, one market indicator is telling us that now is a great opportunity to open a new trade.
Last week, the American Association of Individual Investors (AAII) released its Investor Sentiment Survey. The survey found just 21.9% of investors were bullish on stocks over the next six months.
When you dig deeper into the AAII survey results, you find more evidence of an attractive setup.
The spread between those bullish and those bearish is about -17. That’s over one standard deviation below the average reading of 6.5.
Here’s why that’s important…
Since AAII began surveying in 1987, that spread has only been below one standard deviation from the mean about 20% of the time.
In that same time, the S&P 500 has returned an average of 3% over the following three months when that spread is where it is today.
So in the short term, there’s more upside ahead for stocks.
That puts you in a comfortable position to generate cash through one of our favorite strategies at Palm Beach Research Group.
A Unique Opportunity to Generate Income
At PBRG, we call this strategy an Instant Cash Offering. In finance, it’s called selling “put” options.
Put options allow you to generate hundreds or even thousands of dollars quickly without buying a single stock.
Even better… Elevated volatility increases the premiums you can earn on put options.
That means you can earn higher returns and put less of your capital at risk.
Additionally, we only target the most elite businesses on the planet with our put options.
These are companies that generate huge cash flows… rake in big profits… have billions in the bank… pay steady streams of dividends to shareholders… and are cheap and underappreciated compared to the market and their peers.
So if you’re assigned shares, they’re from companies you’d love to own anyway at a price you’d consider a bargain.
Two companies I’m following closely are Keurig Dr Pepper (KDP) and CVS Health (CVS). These are two defensive stocks that will continue to see consumer demand even during a recession. Plus, they’re both trading at relatively attractive valuations.
If you consider selling put options, I strongly advise you set aside enough cash in your account in the event you’ll have to purchase shares. This will occur if the stocks are trading below the strike price on the day the options expire.
The uncertainty over the debt ceiling negotiations combined with fears of a possible recession will likely create volatility in the short term. But if history is any guide, the AAII survey suggests a short-term rally in stocks.
That presents us with a unique opportunity to generate income from higher options premiums. So whether or not we enter a recession this summer, you won’t have to wait on your cash flow.
Regards,
Michael Gross
Analyst, Palm Beach Daily
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During his special event, he explained what this catalyst is and what types of tokens will benefit from it. For a limited time, you can stream it right here.