Yesterday seemed like the start of the Great Depression for some pundits and nervous nellies. Fear sells, and negative prognosis appears smarter than positive outlooks for whatever reason. The reality, and key reminder we wish to bring up again, is that the long awaited correction has yet to come. As of this writing, we are literally only -3.91% off of all-time S&P 500 highs in the market.
It should be noted that AAII Bearish Sentiment reading is as high as its been since the last most major S&P 500 sell-off.
The “fat lady is singing”, the alarm bells are ringing, and you are literally the last dunce in the room who decided to get into the market at the all-time high. Now Mr. Market shows you what real pain looks like and sells off like nobody has ever imagined.
Let us preface this article by stating it’s worth bookmarking and revisiting for those times when you may be rethinking your investment time horizon or just how much risk you truly are able to take on.
Last week was a microcosm of how stock market headlines can really lead you to hear one thing yet see another. For a while now we’ve been barking about how the FAANG stocks have artificially propped the market as there are some serious underlying health concerns. As a reminder for our newer readers, FAANG refers to the five major U.S. technology companies – Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google (GOOGL). These household names have driven the markets and camouflaged some warning signs of risk on the horizon for quite some time. If you want a peek under the hood or a refresher on just what their impact, valuation, and market caps are relative to the broad market, please click here. (pay close attention to figure 18 which shows market cap with and without FAANG as well as Figures 13 & 14 for some relative earnings/revenue performance)
So…what happened last week? Why did the markets get hit so hard? It was indeed a rough week but then again not too many weeks feel all that bad when we take a quick look in the rear view mirror. (last year there were some mornings when the stock market was down literally -9% before you had your first sip of coffee) Albeit not a pleasant memory, don’t ever forget that (we’ll touch on why later in this article).
It’s been a while since we’ve had to talk about you. The world has been focused on many changes which sometimes leaves you to quietly do your thing while we catch our breath. We’ve ushered in a new year, the United States has a new President and administration, and we’re finally seeing some light at the end of the tunnel with regards to the most surreal pandemic one could imagine.
How have you been… Mr. Market?
Up, down, sideways, and all over the place…That’s how.
Today we write you a quick note to share our all-time favorite chart as well as a reminder to all those investors who may fall prey to short-term memory lapses. The recent stock market sell-off is a great wake up call to the fact that markets obviously don’t just go up in a straight line. It’s a bit more than that though…
Below is our all-time favorite stock chart and we’re going to share why it’s important to look at this every so often.
Why do we bring up this article now? Lots has changed but lots has not! More than anything we believe that our current environment has so many unknowns embedded in it after one of the wildest rides in stock market history. We won’t dig into the weeds too much but one could easily make the case that any of the following scenarios could take place over the next year:
The Stock Market could absolutely continue to defy odds and climb higher.
We could see another market crash like we saw in the spring this year as there are plenty of issues that have not gone away (Covid-19, political unrest, handcuffed economy, geopolitical concerns)
A deteriorating dollar, inflation on the horizon, a ticking time bomb of debt, and more fear of a prolonged recession, negates any appeal for stocks for quite some time.
We trade up, down, and basically sideways as this market consolidates and digests one of the most tumultuous years in history.
Without rehashing all that has transpired in 2020, we believe that being properly allocated and prepared for just about anything that comes our way seems like a wise way to go. The market is almost always unpredictable but there are times when reading the tea leaves and figuring out clear direction is even more difficult; we believe that’s exactly where we’re at right now.
If you didn’t read our old article from 2013, the basis for the Permanent Portfolio strategy is simple at face value: You divide your portfolio into four distinct and fairly uncorrelated asset classes (Cash, Bonds, Gold, and Stocks). Ideally at any point in most economic cycles one of these asset classes will stink it up but the others could compensate and outperform. During prosperous times Stocks should win. When there is inflation a case can be made for Gold. Should the opposite occur and we get deflation you would ideally see long-term Bonds do well. Lastly, during a severe recession Cash is perhaps your best friend. When coupled together you may never hit a home run but this approach can mitigate disaster and still produce modest long-term returns.
We’ve written you hundreds of letters over the past decade and on occasion it’s nice to put a face with the name! Last week, Matt Pixa of My Portfolio Guide, LLC, was given the honor and opportunity to present an Economic Outlook to the Seal Beach Chamber of Commerce.
We share it with you here and look forward to your feedback and questions!
For some of our newer readers it might serve us well to remind everyone of who you are and what this “Mr. Market” character is all about. If you haven’t read Benjamin Graham’s book, The Intelligent Investor, you need to. Even though it was written in 1949, much of what Graham wrote is still applicable today and it’s simply one of the best books on the stock market ever written. Warren Buffett himself loves the book and says that it changed his life. Here’s a summary from Buffett and his description of our very own “Mr. Market”: Continue reading →
We have commented many times on how people have short memories. In the case of recent stock market behavior, however, there is no way one could forget what a ride we’ve all been on. Our job today is not to draw attention to the very obvious past but to one area of the market that is not always directly connected to stocks or bonds.
Do you have gold in your portfolio and if so, should you buy more, hold on to what you have, or dump it? Continue reading →
We won’t rehash what’s happened to the stock market due to the global pandemic of COVID-19. Like many right now, it’s been overwhelming and just hearing the word “Coronavirus” with constant updates has become all-consuming in everything we do. That said, there will of course be areas of the stock market that continue to get punished but others that provide opportunity once we get through this.
We believe the broad market will recover to the full levels we recently saw within the next three years. Some economic sectors, however, will struggle more than others as have a few additional conflicts to resolve. One such sector is oil and with the SaudiArabia and Russian trade spat we saw U.S. oil prices drop -34% in one night! Which stocks will survive and which have the best chance to recover?