Jake Talks 10-years and “Crash or Correction Part II”
FIVE THINGS YOU SHOULD KNOW
- Equity Markets – were lower this week with U.S. stocks (S&P 500) down -1.44% while international stocks (EAFE) fell -0.50%.
- Fixed Income Markets – were mixed with investment grade bonds (AGG) down -0.20% while high yield bonds (JNK) fell 0.24%.
- 3. Geopolitical Risks Persist – This week did little to dispel ongoing tension around the Russia/Ukraine situation as global powers continue diplomatic efforts to defuse the conflict. While Russia vocalized this week that they were in the process of removing troops from the border and that warnings of an invasion are “hysteria”, intelligence from the U.S. and its allies suggest Russia has in-fact been increasing forces at the border. U.S. Secretary of State Blinken will meet with Russian officials this weekend in hopes of agreeing to an amicable outcome.
- 4. Fed Minutes – While the January FOMC minutes didn’t provide much new details, we have seen rate forecasters significantly drop expectations for a 50-basis point hike in March while simultaneously pricing in at least 6 rate hikes this year. Concerns from analysts have now shifted to whether or not the Fed will be capable of slowing inflation without damaging the economy.
- Key Insight – [VIDEO] In this week’s video Jake looks back over the last 10 years of TEN Capital in honor of its recent birthday to share some of his favorite takeaways. [ARTICLE] This week’s article is a follow up to last week’s discussion of current market conditions and considering new ways of looking at markets in general, and more specifically what may lie ahead.
Intro by Tim Mitrovich
As I discussed last week in Part I of this topic on broadening one’s mindsets and definitions regarding markets, too many investors allow arbitrary definitions and hope in order to guide their decision-making process whether they realize they are doing that or not. Such an approach invariably leads to emotional decision making that is counter-productive to one’s long-term goals.
After 25 years I’ve seen how people react differently to market volatility similar to what we are currently experiencing today. Those that have true confidence and understanding due to taking the time to craft a well-thought-out plan and balanced portfolio do quite well both emotionally and economically. Conversely, those that had been investing based on the belief they possessed some special knowledge or courage, quickly fall apart when the “seas” begin to storm.
To be clear, no one “likes” volatility or market declines, but there is a distinct difference between how one can handle them and even profit from them based on the amount of preparation (and humility) they have put into their plan.
It stands to reason then, that talking about potential market volatility, especially extreme volatility, will be uncomfortable to many. But just as athletes or soldiers “prepare” for the challenges they may face to be ready to respond as constructively as possible, so too should investors and that is the purpose of these two messages.
As you read through the thought-provoking second half of Lance Robert’s article, don’t singularly focus on the potential market drops, but rather use the concepts to emotionally prepare for whatever may lie ahead, WHILE ALSO remembering what I said last week; that our prepared client’s plans and portfolios were just fine in March of 2020 and such levels do not have to mean catastrophe to balanced investors (both in their portfolios and emotions).
The main premise of his article, having read many of his other related articles, is not to scare investors in general, but to speak to those that have abandoned sound principles to chase momentum equities and in so doing created unhealthy levels of risk within their financial lives.
For example, if you thought tech stocks were a no-brainer, and based on the recent past perhaps even a no-volatility approach to getting rich quick, you are wearing a pretty big YTD loss that may have already unnerved you – let alone what Roberts points out as a potential path moving forward. On the other hand, for the balanced investor, who has thoughtfully employed the L.I.V.E methodology touched on below, their losses to date are considerably less – as is their likely potential based on history, all while they create the income needed to maintain their lifestyles.
To conclude my thoughts, let’s recap the important purposes behind sharing both last week’s and this week’s messages.
As I stated last week, “my goal with sharing these thoughts is not to frighten anyone or suggest that we believe the hypotheticals he points out are the market’s 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 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 II by Lance Roberts
Just A 50-Percent Decline
Lately, there has been much discussion that a major “bear market” is looming. But given the massive deviation from historical norms, would such a reversion fit the actual definition of a bear market, or will it remain a correction in an ongoing bull trend?
Let’s look at the Nasdaq Index (QQQ), for example. For the first time since March 2020, the index is trading below the 50, 100, and 200-day moving averages. With those previous support levels broken, there could be a “trend change” in the markets.
As noted, the “price trend” is what denotes a “bull” or “bear” market. Since March 2020, the markets traded primarily above their moving averages, suggesting a bull market was intact. However, with markets now trading below those averages, the market’s tone is changing.
Focusing on the Nasdaq is helpful given the extreme weighting of just five companies. The same applies to the S&P 500. The recent cracking of Facebook and Netflix following earnings reports is just a taste of what happens if the support of those “Generals” gets lost.
If the “growth” period of the market is over, then the Nasdaq has a substantial way to fall to complete a 50-percent decline from the 2009 lows. However, that correction would only return the Nasdaq to its previous bullish trend line. Such would imply the bullish trend of prices, or bull market, remain intact.
A 61.8% retracement would make it a “bear market” by breaking the bullish trend.
When you realize that a 50-percent decline in prices would still maintain the “bullish trend” of the market, it just shows how exacerbated markets are due to a decade of monetary interventions.
Fed Driven Excesses Broke The Rules
The over-reaction by the Federal Reserve in 2020 to “bailout” the financial markets due to the pandemic led to market excesses historically unprecedented.
As such, the inevitable “mean reversion” will likewise be just as unprecedented.
A look at the long-term monthly price chart and MACD signal of the S&P 500 index tells the same story.
The current deviation above the running bullish trend lines dwarfs anything seen previously. Notably, that deviation is solely due to the massive injections of liquidity into the financial markets over the last 2-years.
Such is why it is hard to comprehend that a 50% decline in the market wouldn’t technically qualify as a “bear market” as the bullish trend would remain intact.
However, please don’t misconstrue what I am saying. A “mean reversion” will be devastating to the financial wealth of invested households.
Is the decline in January the beginning of something larger? It could be.
Every bear market in history has an initial decline, a reflexive rally, then a protracted decline which reverts market excesses. Investors never know where they are in the process until the rally’s completion from the initial fall.
The deviation of the market due to Fed stimulus was so extended above long-term trends in March 2020, the depth of that “correction” was not surprising.
Given the current deviation dwarfs all others, suggesting that the subsequent decline’s depth is equally as great.
Of course, the question is whether the next round of Federal Reserve interventions will be enough to restore “financial stability.”
“Don’t stress, none of this will happen,” you say?
Maybe? I certainly hope not.
But are you willing to bet your retirement on it?
END of ARTICLE