Broadening Definitions and Approaches to Better Outcomes

In this week’s video Tim discusses the big three approaches to evaluating markets, how we use those schools of thought in our process and how we are viewing markets in light of them today.

FIVE THINGS YOU SHOULD KNOW

Equity Markets – were lower this week with U.S. stocks (S&P 500) down -1.85% while international stocks (EAFE) fell -0.53%.
Fixed Income Markets – were lower with investment grade bonds (AGG) down -0.41% while high yield bonds (JNK) fell -1.37%.
Fed Set to Go – After the Consumer Price Index surged in January to a 40-year high (+7.5% year over year), the stage is set for the Fed to raise rates at their next meeting in March. A hike is all but certain, the question is whether it will be just a 25-basis point or 50 basis point hike – with momentum growing for the latter.
Ukrainian Border Tensions – “The U.S. restated its intention to impose “swift, severe costs” on Russia if the Kremlin further invades Ukraine … the warning from Washington comes as Russia and ally Belarus begin their largest joint-military exercises in years … Western allies have said that a buildup of almost 130,000 Russian troops near the Ukrainian border may signal a planned invasion, but Moscow has denied any such intention.” (via Bloomberg)
Key Insight – [VIDEO] In this week’s video Tim discusses the big three approaches to evaluating markets, how we use those schools of thought in our process and how we are viewing markets in light of them today. [ARTICLE] Staying with the theme of looking at markets and their definitions from different points of view, we share an interesting piece on how arbitrary many market definitions are, and specifically how what many consider a crash, may just be a correction.

INSIGHTS for INVESTORS

Intro by Tim Mitrovich

A few weeks ago, I wrote regarding current repositioning we were doing among some of our strategies within the context of a broader market outlook. In the weeks since, the market has experienced a meaningful uptick in volatility with both sudden drops and strong rebounds.

While highlighting several things we had our eyes on that gave us concern, I did my best to drive home that any repositioning we did was as much, or more about sticking to a defined process than attempting to predict future market movements.

Analysis certainly plays a role in allocation, but equally important is using data and other informed people’s possible interpretations to be prepared for an array of possible outcomes both with respect to the “math” of planning and portfolio allocation, but ALSO to be emotionally prepared. In the commentary video above, I give a quick overview on the types of analysis that exists, how it shapes our process and what stands out today when we bring them all together.

In the WeeklyTEN video (also above), I share a minute’s worth of thoughts on the silliness of arbitrary definition in investing and how some foolishly let it shape how they manage their money and their expectations.

It is with all of that in mind that I share the article below that I fortuitously came across this week as I was reflecting on the media and investor’s misguided obsessions with trying to “tame,” with labels and predictions, a market whose history suggests it acts in such a way to make a mockery of such attempts.

Lance Roberts, who I’ve found to be a thought-provoking commentator, wrote this piece I share below where he both a) challenges traditional investing definitions and b) raises the possibility (not a prediction) that perhaps this market has far more risk in it than many investors are giving it credit for. It is a long and in-depth “thought piece” that I wanted to break up to be both more digestible, as well as allow for me to establish a little context up front.

This week’s Part I, is primarily about calling out the foolishness of the definitions around market corrections and crashes. He does this not only because they do not make much sense in the theoretical sense, but even more because if one looks back on actual historical market events and patterns, these definitions fall woefully short as well.

My goal with sharing this piece is not to frighten anyone or suggest that we believe the hypotheticals he points out are the markets most probable path moving forward. I share the piece because I believe it is VITALLY important to constantly challenge:

the urge to oversimplify the complex, and in so doing, act based on arrogance not understanding,
that false belief, subconscious as it often is, that markets move in anything but unpredictable ways,
ultimately the viability of one’s financial plan and portfolio allocation.

That said, I would say we share his concern that many investors have developed a Pavlovian response/belief that every dip should be bought and that the Fed can act in a way to overcome economic gravity and prevent any future crashes. Too many believe investing is “easy” after the last 12 years … e.g., just buy Apple and/or US growth stocks and get rich (never mind even more speculative ideas).

Whether the mean reversion he discusses is probable or just plausible, investors should consider it, and prepare for it emotionally and within their plan.

Are you prepared? If you are a client of TEN, the answer is almost assuredly yes. None of our plans or portfolios were “broken” or in danger in March 2020 at the levels he discusses within the article; nor do our retirement plans and portfolios solely rely on market appreciation to achieve success unlike so many others do within the industry.

How do you want you and your portfolio to L.I.V.E.? Are you balanced between your Liquidity, Income generation, Volatility protection and Expected Return to weather a variety of possible storms? Or are you guilty of falling for sexy market narratives, simplistic definitions, and subconscious hope that “this time it will be different.”

Enjoy the article, engage in honest reflection, and then employ the discipline to find and stick with a sound process through whatever lies ahead.

As always, we are here and hard at work doing just that for you and your families.

Have a wonderful weekend,

Tim and the team at TEN Capital

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A 50-Percent Decline Will Only Be A Correction: Part I by Lance Roberts

A 50-percent decline will only be a correction and not a bear market.

I know. Right now, you are thinking, how could anyone suggest a 50-percent decline in the market is NOT a bear market. Logically you are correct. However, technically, we need an essential distinction between a “correction” and a “bear market.”

In March 2020, the stock market declined a whopping 35% in a single month. It was a rapid and swift decline and, by all media accounts, was an “official” bear market. But, of course, with the massive interventions of the Federal Reserve, the reversal of that decline was equally swift. As YahooFinance pointed out at the time.

“The S&P 500 set a new record high this week for the first time since Feb. 19, surging an eye-popping 51% from its March 23 closing low of 2,237 to a closing high of 3,389 on Tuesday. This represents the shortest bear market and third fastest bear-market recovery ever.” – Sam Ro

However, as I discussed at the time, March 2020, much like the “1987 crash,” was in actuality only a correction. To understand why March was not a “bear market,” we must define the difference between an actual “bear market” and a “correction.”

Defining A Correction & A Bear Market

Start with Sentiment Trader’s insightful note following the 2020 recovery to new highs.

“This ended its shortest bear market in history. Using the completely arbitrary definition of a 20% decline from a multi-year high, it has taken the index only 110 days to cycle to a fresh high. That’s several months faster than the other fastest recoveries in 1967 and 1982.”

Note their statement that the media’s definition of a “bear market” consisting of a 20% decline is “completely arbitrary.” Given that price is nothing more than a reflection of the psychology of market participants, using the 20% definition may not be accurate any longer.

Over the last 12-years, the pace of price increases accelerated due to massive fiscal and monetary interventions, extremely low borrowing costs, and unrelenting “corporate buybacks.” As shown, the deviation from the exponential growth trend is so extreme it dwarfs the “dot.com” era bubble.

One crucial point is that large deviations above the exponential growth trend historically “mean revert.” Such reversions previously led to very long periods of no returns.

So, what should the definition of a “bear market” actually be?

What Defines A Bear Market

To answer that question, let’s agree on a basic definition.

A bull market is when the price of the market is trending higher over a long-term period.
A bear market is when the previous positive-trend breaks, and prices trend lower.

The chart below provides a visual of the distinction. When looking at price “trends,” the difference becomes apparent and valuable.

The distinction is also essential to understanding the difference between “corrections” and “bear markets.”

“Corrections” generally occur over short time frames, do not break the prevailing trend in prices, and are quickly resolved by markets reversing to new highs.

“Bear Markets” tend to be long-term affairs where prices grind sideways or lower over several months as valuations are reverted.

The price decline in March 2020 was unusually swift using monthly closing data. However, that decline did not break the long-term bullish trend and quickly reversed to new highs, suggesting it was a “correction.”

Given the already large deviations from the trend in 2020, it required more than a 20% decline to retest the trend. If you review the chart above, the subsequent retest of the bullish trend will require something substantially larger in magnitude.

To be continued … Part 2 coming next week