U.S. stocks ended Monday's session off their session highs to kick off the fourth quarter, after a volatile third quarter. The S&P 500 had its largest one-day gain since July, gaining 2.6%.  The Dow ended up 2.7% and the Nasdaq Composite finished up 2.3%.  James Demmert, Founder and Managing Partner of Main Street Research, joined Cheddar News' Closing Bell to discuss.

U.S. Stocks Close Off Session Lows to Kick Off Q4

turning back to the major indexes joining us now. James Demmer founder and managing partner of the Investment Management for our Main Street Research. Thank you so much for joining us. I want to get your take on the market action we're seeing for this first trading day of the fourth quarter as we know inflation and the global slowdown economically is persisting. How do you feel today Asia? Thank you. Uh Well I think we all feel better if this is why we call it a relief rally. I mean, gosh, it was a difficult september quarter in a year so far. But I do think investors should be very careful to think that this one day of strength is the beginning of something spectacular. In fact, I'd say it's the beginning of a bear market rally but going into this now earning season officially today, I think Tesla might be a good example or Fedex and G just a week or two ago of what's to come in the next quarter. So investors should be real careful here. Yeah, appreciate that outlook and I want you to dig in just a little bit deeper because over I would say the past year or so we've been talking about recession concerns and now I think a lot of investors are zooming out just a bit looking at the global economy and what that means for us moving forward. What would you have to say beyond even this month? We've heard it could be a tough month, it could be a tough quarter. Where do you think the market goes from here in potentially what could be the beginning of a bear market? Yeah, we would suggest that we're already in a bear market and it's really Federal Reserve created. They got way behind the curve when trying to control inflation, which is really the primary problem that the economy has inflation at one point 9/9 still over 8%. And their goal is to get it to, to, that tells us that they're going to continue to raise interest rates. That's their number one mandate, which basically means they're trying to and they will effectively contract the economy. Now, will it go into recession? We think the odds are highly likely, um, in equity prices are just not correctly level at this level of value enough. So, um, I think that investors should prepare themselves for what I would call the last phase of the bear market and oftentimes the worst and it usually comes with that one quarter where companies start to report, gosh, we missed our earnings like Tesla did today or Fedex and Ge just a week or two ago. Um, and then they start to also guide lower and that's just not helpful for support of equity markets and sometimes will be just that last phase of the bear market where we go down maybe another 10 or 15%. Um, and then socks are actually priced in a real and maybe not a deep recession, but, but some sort of recession as we go into 2023 I really appreciate that insight as we know, you don't have a crystal ball, but one of the big questions too is timeline, how long are you thinking it will take us to get to that bottom of 10-15%? And how long do you anticipate this recession to last? Yeah, I think those are excellent points for, for your investors listening in, uh, you know, bear markets, it's a good thing to know history. Uh, and you know, and how do we compare to today? So it's a little bit different, but we have to imagine, you know, typically Bear markets are 9 to 15 months long. We're in month 10. So that's from a time standpoint. Uh, we're getting there, I would say again, that sort of marks the two thirds area, but keep in mind recessions oftentimes, equity prices index Fall somewhere between 38-50%. So at the lows last week we're down 25 that tells you you can go easily another 10 and possibly more before we get to that point where the market's really discounted a full on recession and again, it might be more mild because if they can get the inflation rate to really come down in the next quarter or two, I think that that would give investors some appetite to really find value in inequity. So, so to answer your question, yeah, we're closer in time, I'd say another quarter, Maybe we have a bear-market rally again and then we go down lower. Um, and and then in price we need to get down to closer to 13, 14 times earnings and that, you know, that would take us down another 10 or 15%. And that that's where we would probably get really, really interested and constructive about equity prices. Okay. And James, you've also said that there are opportunities in today's market in recession proof businesses, fixed income in the U. S. Dollar. Can you just elaborate a little bit more about that? What are some of these recession proof businesses? We often hear about staples and things that people will consistently need moving forward but just give us a little bit more detail. Yeah, I'd love to, you know, the opportunities are always there, you know, as we like to say, there's always a bull market somewhere. I know someone else said that as well that we know and we believe that. So if if you really went into this year as we did by using some risk manager tools like stop losses, you sort of got away from the innovator stocks and some of the some of the stuff that's really gotten crushed. But there were there was and there still is opportunity, the consumers and what I mean by that is Procter and Gamble, which makes tide detergent and crest toothpaste. People brush their teeth where companies in the healthcare space like novo Nordisk, which is the largest insulin provider in the world and has consistent growth and McKesson, which is also in the same space utility stocks, these are not exciting names, but there are consistent growth and they are recession proof. There's also the op opportunity that we've taken in the U. S. Dollar this year, which has been a very helpful foundation for the portfolio as well as shorting positions and indexes here and there to sort of just give the portfolio a little bit more of a buffer. So there are things to do in bear markets. Um and one of them is not to be over the network and I think that's the most important and then just to kind of hide in the recession proof sectors. Yeah. And something we mentioned is that people are moving away from just focusing on a potential recession and really looking at the global picture when it comes to the economy, you say they're going to be a lot of great values in foreign equities once the bear market is over. So how should investors be navigating places like Europe and also other emerging markets. And I just want to point out what you had said, uh 9-15 months long for the bear market. And it seems like we're in about month 10. Yeah. And I think it's an excellent time to still manage downside risk because again, the last phase of the bear market can be pretty ugly. Um so if you haven't done that, do it. But but you know, really important and what we really spent most of our summer doing is putting together a list of everything we love to buy in the recovery, new bull market a market which which we envision probably early in 2023. You know, the stock market will not wait for the economy to fully go through recession. It'll bottom before that happens and then move up. So that should include for all investors companies from around the globe, there's some exceptional opportunities in europe where companies and stocks have gotten battered. Um, and that would be in the technology space or in the financials or in anything what I call cyclical, economically cyclical and here in the US as well. Certainly in the financials here in the US any of the big banks, brokerage firms, technology for sure. The semiconductor industry, I mean this is an exceptional time to make a list, check it twice and get ready to buy into that market bottom. I do not think we are there yet. I love today. It felt better than anything has in a while. But I do think it's a head fake and we go lower and that's going to present an opportunity for investors to really acquire global, great global companies based in US and outside the US. Alright, really fitting in sight. Especially as we head into this holiday season, that's James Demmer founder and managing partner of Main Street Research. Thanks so much for joining us.