Finally. It’s here….a bonafide stock market correction. What’s also almost here is Groundhog Day…but more on that in a minute. For those of us with short memories we’ll have to do the necessary preamble and small talk refresher on what this is. For those of you who remember what you did (or were supposed to do/not do) during the last correction, here we go again. Do you remember the fantastic Bill Murray movie “Ground Hog Day”? Click here for the last time we wrote about it but again….people seem to forget what they ate for breakfast so you may not remember what happened in 2018.
Oh… but “it’s different this time“, right? Those are indeed the four most dangerous words in investing. Are there problems to worry about? YES!!!! (but there always has been and always will be)
When it comes to the stock market it’s easy to see the road we just traveled; what’s more difficult is trying to assess and figure out where we’re going. In last quarter’s newsletter from My Portfolio Guide, LLC we put out a fairly bold prediction of the S&P 500 hitting 5,000 and the Dow Jones reaching 40,000 within the next year. Also included in that edition of “the Guide” (click here to view it if you haven’t already), we discussed some common behavioral biases that we’re all vulnerable to. As we head into Thanksgiving and then the last month of the year, the fear levels are beginning to mount again. There’s plenty to worry about, such as inflation, and speaking of that, it’s sort of like your in-laws visiting….They arrive earlier than you expected and stay longer than you’d like!
While we’re not telling people to be 100% into equities…it’s becoming more and more clear that for the foreseeable future there is no better horse to ride. We’re going to call this proverbial horse “Tina” and share why in a moment. Sure, our gold hedge is not providing instant riches but remember that is not why we bought it. Additionally, we’re seeing more and more people buying crypto as the “new gold” yet most can’t even explain what it actually is. We’d prefer to see Tom Brady pitching Subway sandwiches but now he’s doing crypto commercials. Bonds are awful and going nowhere (yet to some degree justified as part of your overall allocation). Cash is still earning “point zero nothing”. Real estate has exploded and bubbled upwards some more but does it feel smart to you to be the highest bidder on a property right now? All this leads us back to our horse TINA… There Is No Alternative.
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.
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).
You’ve heard us barking about this before but as the world navigates its way out of the Covid-19 pandemic, it won’t be just the stock market that recovers. In many respects the market has mainly bounced back due to a lot of “sugar in the blood” from massive fiscal stimulus and has still primarily been led by some mega cap names. What’s brewing below the surface and actually could turn into something far more sustainable, is a boom in commodities.
Have you ever heard the expression “Even a blind squirrel find a nut once in a while?”
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.
November 3rd is looming large in many minds this year. That’s right, it will be Dolph “Ivan Drago” Lundgren’s 63rd birthday! Big news for sure, but unless you’ve been living under a rock, you know we also have a presidential election to decide.
We know one of these three will be celebrating November 3rd. How about the other two?
Okay, you may not be celebrating the great movie villain that day, but hopefully you do have a plan for voting. Many investors are wondering if they need to have a plan for their portfolios, either leading up to or following election day. There are interesting market factors to consider around election years, but are they compelling enough to act on?
In the most recent edition of “the Guide“, we focused it much on how the election will potentially pan out and what “Mr. Market” has done in years past as well as how that could play out in this very unusual environment. Click here to view the newsletter.
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 →