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Patterns Break, Sound Processes Don’t

Every year the media loves to predict a September swoon and use every market hiccup to signal the beginning of a new correction. The reality is something far different, and the current market and economic outlook has plenty of reasons to be optimistic if one keeps a healthy perspective.


  1. Equity Markets – were lower this week with U.S. stocks (S&P 500) down -0.90% while international stocks (EAFE) fell -0.81%.

  2. Fixed Income Markets – were mixed with investment grade bonds (AGG) unchanged at 0.00% while high yield bonds (JNK) rose 0.21%.

  3. 3. Another Blow to President’s Stimulus Plan - House Ways and Means Chairman Richard Neal noted this week that there remains insufficient support from House Democrats to progress Biden’s plan to raise taxes on inherited assets. Debates and differences are also expected on other major facets of the plan including climate change, healthcare, and taxes that should serve to further prolong discussions on the $3.5 trillion plan.

  4. Energy Surges - Both oil and natural gas surged this week across the globe on news that supply is well below forecasts at the moment as a result of production halts due to Hurricane Ida and Nicholas. Ongoing inflation concerns have also seen input prices increase which could cause stagnation-like risks if we see sluggish economic growth. As a result, U.S. gasoline prices at the pump have hit their highest level since 2014.

  5. Key Insight – [VIDEO & ARTICLE] Every year the media loves to predict a September swoon and use every market hiccup to signal the beginning of a new correction. The reality is something far different, and the current market and economic outlook has plenty of reasons to be optimistic if one keeps a healthy perspective.


A. What’s the Bigger Fear? - Temporary Weakness vs. Lost Opportunities

Every fall the part-time pundits begin to sound the alarm regarding an early fall swoon (or worse) for the stock market. It’s true some of the market’s most notable crashes have occurred in the fall, and in general the early fall has had its moments of weakness, but such narratives miss the bigger picture/story.

Bespoke recently highlighted the importance of keeping perspective (see also our video from August 6th here), stating “September is a seasonally weak time of year for the equity market, and the gauges from our Stock Seasonality tool below illustrate this trend. Over the last ten years, the week following the close on 9/3 has seen a median decline of 0.43% which ranks in the 15th percentile relative to all other periods. For the upcoming month, the S&P 500's median gain is just 0.08% which doesn't rank much better (22nd percentile).

As the old cliche goes, though, short term pain is often followed by longer-term gains, and in the three months that follow the close on 9/3, the S&P 500's median performance over the following three months has been a gain of 6.09% which ranks in the 97th percentile relative to all other three-month periods. Like April showers bringing May flowers, September pain has often been followed by Q4 gains.”

Seems obvious to give one’s investment time (not that a mere three months should require much patience), especially when one considers the graphic below, but MANY investors have traded away those “6% gains” to avoid “0.4% losses.” Timing the market is a fool’s game.

Despite the S&P 500 only being down roughly 2% from its late August highs, it hasn’t stopped any number of people in the media or investment houses from trying to “predict” the next correction/crash. Beyond their miserable track-record of accurately predicting the timing of such events, is the fact that rarely, if ever, do they “pound their chest” to get in/get back in which is of course, the issue with market timing – YOU HAVE TO BE RIGHT TWICE!

After a near doubling in the stock market from the COVID Crash lows of last march, without a single correction, it shouldn’t come as a surprise to anyone, if and when, volatility picks up for a bit. And yet, it’s nothing one needs to fear with proper planning either.

Keep in mind roughly 80% of any level of drop in the market becomes something twice as bad (e.g., 5% drops becoming 10% declines, or 10% becoming 20% declines), as well as the fact that every bad day in the markets cannot be explained – especially by fundamental analysis alone, as is so typical in the media. Quantitative issues such as options expiration dates or VIX trading ranges and current levels are rarely discussed due to their complexity but explain far more of the markets moves over the short run than the items which typically make their way into news stories.

B. And Now Some Good News

Lost amongst all the fear-mongering around the S&P 500’s 2% decline is that things actually look pretty good if one looks past the immediate to the intermediate term. (Side note: never pay attention to anyone’s outlook that still quotes Dow Jones points to highlight market weakness – 200 points in the Dow isn’t what it was 20 years ago).

Goldman Sachs puts out a great set of data regularly that looks at the economy as a whole to evaluate where possible risks are within the system. I particularly like the layout below, as it not only highlights where things are today, but where they are compared to pre-2008, for all the people trying to analogize the two timeframes.

In explaining the chart/data, Goldman noted the “US financial balances today suggest only modest risk to the economy and risk assets. Valuations remain elevated in equities, credit, and real estate, however the quantity and quality of household and private sector debt is quite healthy. Especially when compared to the period before the Global Financial Crisis, there are limited signals flashing red today.”

Outside of the economy in general, the other big concern of course is the ongoing pandemic and in particular the new Delta variant. Commentator/Analyst Tom Essaye addressed these concerns with some reasons to be optimistic based on recent information out of the Institute for Health Metrics and Evaluation. He stated, “For those that haven’t heard of this organization (and that included me until recently) it’s essentially a healthcare think tank/data aggregation organization that was founded in 2007 by the Gates Foundation and the State of Washington (it’s based in Seattle). Since 2020, they’ve been running prediction models on COVID trends, and they’ve been pretty accurate. And based on what we saw in India and in the UK Delta variant outbreaks, the IHME predicted that the peak of this COVID outbreak occurred on August 21. Positively, that prediction is largely being backed up by the fact that 1) The positivity rate of cases is now falling (down 1% to 9.7% over the past few days), 2) Hospitalizations (which are a lagging indicator but given insight into the peak of cases) are now falling and 3) The seven-day moving average of cases is starting to roll over.”

Much like a sailor, it is an inevitable truth in the life of an investor, that there will be “waves” of volatility and threatening “storms” on the horizon with some frequency. None have to be fatal or keep you from your destination. However, rather than try to predict the weather or calm the waters, keep your focus on what you can control – the soundness of your plan (e.g., boat).

Perhaps the greatest threat to your portfolio/plan is not worrying about a market correction but chasing the next market high. If that’s you, consider the great short piece by Seth Godin below which addresses something we’ve highlighted before, which is not confusing your “investments” with what is really, speculation.

Have a wonderful weekend!

Tim and the team at TEN Capital

Speculation is the new luxury good by Seth Godin

A luxury good is one where the price paid is much higher than the apparent utility it offers. We pay extra precisely because it’s not a good value. The utility lies in how we and our peers think about it. The scarcity and bling of a luxury good are used to increase our status (in our own eyes and those in our cohort).

And so, a top-end Mercedes isn’t much better at being a car than a Hyundai is, it simply costs more.

As engineering has improved and knock-offs have increased, though, the two-hundred-year tradition of physical luxury goods is fading away.

One thing that’s taking its place is speculation.

An NFT has zero utility. It’s simply an entry in the blockchain that shows ownership of something that anyone could see for free.

But that in itself is a sort of luxury.

There are now hundreds of digital NFTs each worth more than a million dollars each. Just like Reddit stocks, they change in value dramatically, they come with a story and they’re fun to talk about with your friends and peers.

And one day, every one of them will be owned by someone who is unable to sell it at a profit.

Speculation is a great hobby if you can afford it, but it shouldn’t be confused with investment.

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