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What's Past Is Prologue

What's Past is Prologue The past may be prologue, but we are not captive to follow any pre-determined path. We explore 5 important investing truths that can keep us from making a “fatal” mistake as to our plans and portfolios, which looking at what recent data tells us may lie ahead.

What's Past is Prologue

The past may be prologue, but we are not captive to follow any pre-determined path. We explore 5 important investing truths that can keep us from making a “fatal” mistake as to our plans and portfolios, which looking at what recent data tells us may lie ahead.


  1. Equity Markets – were higher this week with U.S. stocks (S&P 500) up 1.42% while international stocks (EAFE) rose 3.79%.

  2. Fixed Income Markets – were higher with investment grade bonds (AGG) up 2.16% while high yield bonds (JNK) rose 2.71%.
  1. 1859 All Over Again – as of publication, Rep. Kevin McCarthy has gone through 13 rounds of voting as Congress failed to elect him as the majority Speaker of the House, missing the mark of the 218 votes needed. To put in historical context, 44 rounds of voting were needed in the Congress of 1859 to elect a speaker. While it is not expected to last this long, McCarthy has made concession after concession to far right holdouts on his speakership but flipped several Friday. Until a majority leader is elected, Congress cannot swear in new members, or start official business at the Capitol.
  2. Russia Calls for Ceasefire – Vladimir Putin called for a 36-hour ceasefire with Ukraine to observe Russian Orthodox Christmas on January 7th. The request from the Kremlin was passed onto to a skeptical Zelensky, as many Ukrainian fighters and global politicians called the appeal a ‘public relations stunt’ with no merit. The request from Putin was clearly undercut by Russian forces continuing heavy shelling in the Donetsk Province and in residential areas. The ceasefire will supposedly run through Saturday night but has not been agreed to.

  3. Key Insight – [VIDEO & ARTICLE] The past may be prologue, but we are not captive to follow any pre-determined path. We explore 5 important investing truths that can keep us from making a “fatal” mistake as to our plans and portfolios, which looking at what recent data tells us may lie ahead.


“The past may be prologue” but what we learn from the past is that market’s most likely move is one which will surprise the most investors. Therefore, unlike most would suspect, the future is likely not a continuation of any recent market strengths, weaknesses, or leadership but rather some surprising changes.

With that 5 Key Market Truths to keep in mind as we begin 2023.

1. Buying Low is Hard and Scary

I routinely have people ask something to the effect of, “how could this possibly be the bottom, everything is so bad?” To which I point out, what do you think a bottom would feel like? People understandably want to wait for the all-clear, but the only time investing seems obvious/easy is in hindsight and “good environments” more often than not, define a market top as opposed to an opportunity.

It is important to also call out that the only way to opportunistically invest is if you and/or your portfolio is generating free cash flow, or you were properly diversified heading into the bear market. At this point, you either were properly positioned in one or both of those ways, but whenever the next bull market ensues my hope is you’ll remember to check and make sure you are beginning to prepare for its end, not trying to chase it higher.

2. Recency Bias Skews Your Perspective

It’s just human nature to assume whatever has been, will continue, it’s just so hard to see something that doesn’t yet exist. And yet, a look back on forecasts of any kind (sports or markets) show that the future usually holds more surprises than is expected.

Consider that heading into this football season the defending Super Bowl champion Los Angeles Rams were once again a favorite to win it all and forecast to win more than 10 games with over 93% of bettors betting they would win 11 or more games. What happened? They currently sit at 5-11 with one game to play.

Ask yourself as you read all the confident forecasts from various analysts for a flat to down year, where were those calls last year at this time?

The best example of the ever-changing nature of markets is the famous “quilt chart” reflecting asset class performance over the years. As you can see from the following chart, leaders (top of the chart) change regularly and there is no discernable pattern. So yes, cash ruled in 2022 coming in second, but if you look at where it usually resides and how it usually responds after being near the top you may reconsider following the herd to the sidelines.

Which brings us to our next point.

3. Fade the Herd

Markets tend to trade far more on relative expectations than perceived absolutes, and right now expectations are providing investors with a historically low hurdle to improving returns.

Consider, that only 20% of respondents to the AAII’s latest investment sentiment survey came in bullish. Such responses extended the current record making streak of bearishness outweighing bullishness to 40 weeks!

As Bespoke noted, the only other time the sentiment readings from the AAII, Investor’s Intelligence and National Assoc. of Active Investment Managers were all 1 standard deviation below their historic average for a full year was June of 2008 to June of 2009.

As we’ve noted in recent commentaries, Bank of America’s strategist Savita Subramanian stated in a piece this week, “One reason we are more constructive on equities in 2023 is the big drop in sentiment during 2022 … It has been a bullish signal when Wall Street strategists were extremely bearish, and vice versa.”

4. Markets Respond to Trends Not Current Levels or Environments

What this means is “bad can be better than good” if the environment is moving from “less bad” to “less good.” Similarly…

5. Markets are Forward Looking, Usually Reflecting an Environment 6-9 Months Out.

Points #4 & 5 are especially important as we look at the current battle being waged for the stock market’s future direction between inflation and earnings expectations. Currently, inflation is too high, and earnings are projected to be too weak. However, a look over the valley seems to reflect a brighter picture developing.

On the inflation front, the data reflects that inflation levels are set to fall meaningfully. As noted by Torsten Slok at Apollo, “Supply chains are back to normal, and the price of transporting a 40-feet container from China to the US West Coast has declined from $20,000 in September 2021 to $1,382 today, see chart below. This normalization in transportation costs is a significant drag on goods inflation over the coming months. Services inflation will be driven lower by declining rent inflation. Wage inflation remains elevated, but we have just had an extended period where consumer price inflation was higher than wage inflation. So companies and profit margins will also be able to deal with a period where wage inflation is higher than consumer price inflation. The bottom line is that the Fed and the consensus are right to expect a decline in inflation as we go through 2023. And new Fed research here shows that inflation persistence is less of a worry.” (see accompanying chart)

The team at Bespoke noted other, “…positive news related to inflation as the Prices Paid index dropped from 43.0 down to 39.4, which was the lowest reading since the depths of the COVID lockdowns. Over the last nine months, the Prices Paid Index has declined from a post-COVID peak of 87.1 down to 39.4.”

This week seemed to bring the “goldilocks” set up on the labor front that stock market bulls had been hoping for, thus Friday’s 2%+ jump in the S&P 500, with the job market reflecting stability with non-farm payrolls growing by 223,000, but wage growth finally decelerating in Friday’s most recent report. Such a set up reflects a genuine resiliency in the economy that is inconsistent with fears of a deep recession or economic collapse.

The Fed seems to be taking notice with last year’s rate “hawk” St. Louis Federal Reserve President James Bullard issuing a “dovish” statement that reflected with belief that “rates are getting near to high enough to temper inflation.” (Source Bloomberg)

Similarly, while current projections are for corporate earnings growth to decline to a slightly negative rate by mid-year, the back half of the year reflects renewed growth culminating is Q4 growth of well over 5%. If this is comes to pass, don’t be surprised to see markets begin their next ascent long before the data becomes official.

So, yes while the past always brings us to our current situation as was reflected in Antonio’s famous line in The Tempest unlike his conclusion, we are not captive to follow any given path but rather can choose an investor to let our fear and emotions keep us from doing the right thing, and in so doing risk “killing” (pun intended) our financial goals and dreams.

Have a wonderful weekend,

Tim and the team at TEN Capital


Data points this week included:

  • U.S. Jobless Claims – dropped below market expectations to 204K for the week ending December 31st after a previous level of 223K. This is the lowest number since late September, and still points to a tight market. The 4-week moving average declined to 213.75K from 220.5K.
  • U.S. Manufacturing Index – the ISM PMI declined to 48.4 in the month of December and marks the second month of contraction in factory activity. New orders dipped from 48.2 to 46.2 and new export orders also fell from 51.5 to 48.5. Employment rebounded with companies managing headcounts. The MoM performance of supplier deliveries (45.1 vs 47.2) was the best since March 2009.
  • U.S. Jobs Added – the U.S. economy added 233K jobs in December and trounced market forecasts of 200K additions. This was down from the month previous of 256K jobs added and marks the lowest growth since December 2020. Leisure and hospitality added 67K, along with healthcare adding 55K, and construction adding 28K. In 2022, payroll employment rose by 4.5M with an average monthly gain of 375K as the labor market normalizes from the pandemic shock. The unemployment rate wrapped up at 3.5%.
  • U.S. Balance of Trade – the U.S. trade deficit narrowed to ($61.5) billion in November 2022, the lowest since September of 2020 and off from forecasts of ($73B). Exports fell (2%) to $251.9 billion. Imports also declined (6.4%) to ($313.4) billion. The deficit with China decreased by ($5.8B) to $(20.4B) and the deficit with the RU contracted by ($3.6B) to ($19.5B).
  • U.K. PMI Composite – the U.K. composite PMI edged up to 49 in December 2022 from a reading of 48.2 in November. Services only recorded a fractional fall in activity and the overall decline in output signaled by the index was only marginal and the slowest since September. Both services and manufacturing recorded declines in new business. Input cost inflation headed sharply downwards during December, reaching lowest level since May 2021.
  • Eurozone Retail Sales – increased to 0.8% MoM for November and was slightly above forecasts of a 0.5% rise. Non-food product sales rose 1.6% and sales of auto fuel rose 1%. Food sales continued to decline at 0.9%. YoY, retail sales have dipped (2.8%).

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