From Teeka Tiwari, editor, Jump Point Trader: A lot of (digital) ink has been spilled over the idea that dropping commodity prices are foretelling a worldwide recession.
It seems plausible. But does it hold up to historical scrutiny?
Our research suggests it doesn’t.
Three of the last four commodity collapses have happened in the middle of a recovery—not in the beginning of a recession.
Declining commodity prices are very helpful to consumers and corporations.
As Jim Paulsen, head of Wells Capital Markets, recently remarked:
Recessions occur after commodity prices go up, not when they go down. When they go down, it’s a huge, stimulative event.
My thesis last year was: The data for the first six months of 2015 would be poor. But as we entered the back half of the year, the economic data would improve.
We’re already starting to see that happen.
The manufacturing data from June and July show large improvements over first-quarter data. Consumer confidence has increased to its highest reading since January. Home sales have hit a post-recession high, and housing prices are rising… three times faster than inflation.
Second-quarter gross domestic product (GDP), released yesterday, is at 3.7%—1.4% higher than the rate reported last month.
Does that sound like a recession to you? Me neither.
The key takeaway here: The U.S. economy is in pretty good shape, and stock prices are cheap.
But there’s one more looming question…
Have we hit bottom?
I don’t know. It’s certainly possible we could have a “dead cat” bounce from the recent downtrend, then turn around and retest the lows.
That sometimes happens after a big sell-off.
Here’s the thing: Asking if “we’ve hit the bottom” is the wrong question. It’s a question we can only answer in hindsight.
The better question is: “Do stocks represent a good value here?”
And the answer to that question is YES.
We also have to ask ourselves whether the secular bull market that began in 2009 is still intact.
The answer to that question is also a resounding YES.
What to do now
Stand pat on the existing positions you currently own. They will come back as the market recovers.
For JPT subscribers, the new buy signals generated from these levels will lead to large gains… Just like they did after the corrections we saw in October 2011 and October 2014.
Our job here is to continue to use strict position sizing and let the market do the heavy lifting.
Then, we’ll be in a position to reap huge profits when the market roars back.