Be Careful Out There

Investing Strategies Mechanical Investing
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A perhaps unnecessary pre-emptive post. I have a concern, and frankly it may be unwarranted. Looking at the number of recs every “minor bottom” maybe post from Mungo is getting…

…well aware of the excessive above-trend market returns of the last several years…

…with a layman’s understanding of human market psychology…

a rising tide lifts all boats, and happening to be right about a decision doesn’t make you brilliant (usually), no more than being wrong makes one an idiot, and absolutely not someone elses fault…

…and watching the self-aggrandizing cheerleading from latecomers to Saul’s board not understanding that BIG money trend-following in the market drove their outsize returns in 20-21, and then turning on the hand that fed them the ideas during a “risk-off” tsunami having nothing to do with those companies…

Please… please don’t make mungo or anyone else out here your gurus. Mungo’s models ARE top notch; but… history only rhymes sometimes, it doesn’t repeat.

If you buy on a “minor”/“simple” or “major” bottom, it’s YOUR decision. If it goes wrong, no accusatory critical attacks on Jim or anyone else. If it happens to be bottom-ish and turns into a good return over the next couple years, great!

We’re all hopeful that after 5 months of this bear/correction the end is near. But it may not be. We’re in uncharted waters with a double barreled Fed. 2008-9 lasted 15 months with 3 or 4 of intermediate “whew it might be over” rallies - that failed.

FC

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We’re all hopeful that after 5 months of this bear/correction the end is near. But it may not be.

I suppose by the end of 1929, people were hopeful that the end of the bear correction was near, but it got worse and worse during 1930 and 1931 and it did not really recover until the early 1950s…

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Agreed. This feels like the beginning of something big, and long term. All sorts of markets are out of whack. All asset classes have been in a bubble. Wealth concentration is at historic highs. Labor markets are tight despite the fact that labor force participation rates are at their lowest levels since 1977. While wages are rising and official unemployment is falling, we’re seeing homelessness explode. Deaths of despair continue to stunt our overall life expectancy. The class divide is now so enormous that there appear to be separate worlds of human experience that are inaccessible to each other. The past 40 years of the expansion of globalization seem to be coming to an end. Nationalism and xenophobia are on the rise everywhere in the world (probably linked to the reaction against globalization). American politics seem to be teetering on a brink. Really the political polarization is happening in every country globally.

None of this chaos is entirely new. If we were to take a brief tour of American history we would find the same themes in each epoch. Despite this chaos, markets rise and markets fall. Usually along some significant arc. There have been three secular bull markets since 1948, and two secular bear markets. We appear to be entering the third. Here are the inflation adjusted S&P prices from peak to trough of each secular bull and bear since 1948:

1948-1968 Bull S&P rises from 171 to 880 (+515%).
1968-1982 Bear S&P falls from 880 to 316 (-64%).
1982-2000 Bull S&P rises from 316 to 2437 (+771%).
2000-2009 Bear S&P falls from 2437 to 996 (-59%).
2009-2022 Bull S&P rises from 996 to 4785 (+480%).
2022-2034 Bear S&P falls from 4785 to 2100 (-56%).

https://www.macrotrends.net/2324/sp-500-historical-chart-dat…

One thing remains relatively constant throughout these secular trends–the compound annual growth rate is around 3% from peak to peak and trough to trough. This tells us something about where the bottom might be if we are indeed in a secular bear. The previous two bears lasted 14 and 9 years. Lets assume this one splits the difference and lasts a dozen years. If these trends hold then we can expect this bear to bottom around 2100 in current dollars sometime around 2034.

Bottom line is that the market needs to fall and fall a lot to get us back on the 3% + inflation economic growth trend line. I don’t think this “correction” is any where near worked out. Indeed, I’m quite concerned about my retirement prospects if we are in fact at the beginning of a secular bear market.

PP

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I’m still working off losses from the dot-bomb era……that was a learning lesson for me………things can be going great for years and years and I start thinking I’m a genius even while researching stocks very carefully…. It’s best to look at research with a gimlet idea and remember the previous painful lessons I had to learn.

The market is going down for sure……yes, it may go up but I consider them head fakes at this point. I’m sitting tight.

Lucky Dog

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None of this chaos is entirely new. If we were to take a brief tour of American history we would find the same themes in each epoch. Despite this chaos, markets rise and markets fall. Usually along some significant arc. There have been three secular bull markets since 1948, and two secular bear markets. We appear to be entering the third. Here are the inflation adjusted S&P prices from peak to trough of each secular bull and bear since 1948:


1948-1968 Bull S&P rises from 171 to 880 (+515%).
1968-1982 Bear S&P falls from 880 to 316 (-64%).
1982-2000 Bull S&P rises from 316 to 2437 (+771%).
2000-2009 Bear S&P falls from 2437 to 996 (-59%).
2009-2022 Bull S&P rises from 996 to 4785 (+480%).
2022-2034 Bear S&P falls from 4785 to 2100 (-56%).

Probably would be worse if these were inflation-adjusted.

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Here are the inflation adjusted S&P prices from peak to trough of each secular bull and bear since 1948:

1948-1968 Bull S&P rises from 171 to 880 (+515%).
1968-1982 Bear S&P falls from 880 to 316 (-64%).
1982-2000 Bull S&P rises from 316 to 2437 (+771%).
2000-2009 Bear S&P falls from 2437 to 996 (-59%).
2009-2022 Bull S&P rises from 996 to 4785 (+480%).
2022-2034 Bear S&P falls from 4785 to 2100 (-56%).
-----------------------------------------------
Probably would be worse if these were inflation-adjusted.

They are inflation adjusted.

Be advised… I just ran into this a few weeks ago. The 1929 and 1965 Bears don’t look as bad if you include the dividends. I don’t have the citation and numbers but if you include dividends and the “depression” of prices, 1929 recovered by 1938. I know that is of little consolation in 2022 though. We will (hopefully not) have any significant depression a la 1930s and S&P average dividends are under 2% last I looked. But as someone said above things will likely not unfold precisely as in the past. They will incorporate The Present’s unique environment and personalities.

How would 1965-1982 if you just missed 1973 & 74? (easy to do using some conservative 200 SMA system) I suspect a lot better. Add in less stocks and less bonds and you’d be even better off. I search I did about a year go that showed even lowly money-market-funds trailed the actual inflation rate then by only .15%. No, not a money maker but kept you in the ballgame pretty close.

About 10 years ago I ran spreadsheets to see how slow-go timing using the 40 week SMA did vs buy & hold in the 50’s,60’s 70’s, 80’s, 90’s, and 2000’s. In Two decades ( the obvious ones: 70’s and 2000’s) timing BLOUNCED B&H. In 2 decades B&H did better but you didn’t end up eating out of a 50 lb bag of dog food either. And in 2 decades the end results were pretty close. Nobody starved. So, I guess eat, drink, and be merry but not too much until we see where this is going.

PS: I’m not shilling for market timing nor 200 day/40 week MA. Just providing perspective. I am fundamentally lazy and suspicious of complicated schemes, ergo I just used the simplest well-known system I had heard of at the time.

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I search I did about a year go that showed even lowly money-market-funds trailed the actual inflation rate then by only .15%. No, not a money maker but kept you in the ballgame pretty close.

Errata: The MMF number is misstated. The actual number I found indicated MMF interest was .85% behind the inflation rate. Not quite one full percentage point. Still remarkably close at a time when stocks and bonds were getting hanged, dragged, and quartered.

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We’re all hopeful that after 5 months of this bear/correction the end is near.

A very non-mechanical but very worth reading post with respect to this (I suspect many here are reading the BRK board anyway):

https://discussion.fool.com/said2-i-used-information-from-the-sa…

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If these trends hold then we can expect this bear to bottom around 2100 in current dollars sometime around 2034.

THIS TIME IT’S DIFFERENT!

(Just kidding :slight_smile:

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Agreed. This feels like the beginning of something big, and long term. All sorts of markets are out of whack. All asset classes have been in a bubble. Wealth concentration is at historic highs. Labor markets are tight despite the fact that labor force participation rates are at their lowest levels since 1977. While wages are rising and official unemployment is falling, we’re seeing homelessness explode. Deaths of despair continue to stunt our overall life expectancy. The class divide is now so enormous that there appear to be separate worlds of human experience that are inaccessible to each other. The past 40 years of the expansion of globalization seem to be coming to an end. Nationalism and xenophobia are on the rise everywhere in the world (probably linked to the reaction against globalization). American politics seem to be teetering on a brink. Really the political polarization is happening in every country globally.

None of this chaos is entirely new. If we were to take a brief tour of American history we would find the same themes in each epoch. Despite this chaos, markets rise and markets fall. Usually along some significant arc. There have been three secular bull markets since 1948, and two secular bear markets. We appear to be entering the third. Here are the inflation adjusted S&P prices from peak to trough of each secular bull and bear since 1948:

1948-1968 Bull S&P rises from 171 to 880 (+515%).
1968-1982 Bear S&P falls from 880 to 316 (-64%).
1982-2000 Bull S&P rises from 316 to 2437 (+771%).
2000-2009 Bear S&P falls from 2437 to 996 (-59%).
2009-2022 Bull S&P rises from 996 to 4785 (+480%).
2022-2034 Bear S&P falls from 4785 to 2100 (-56%).

https://www.macrotrends.net/2324/sp-500-historical-chart-dat……

One thing remains relatively constant throughout these secular trends–the compound annual growth rate is around 3% from peak to peak and trough to trough. This tells us something about where the bottom might be if we are indeed in a secular bear. The previous two bears lasted 14 and 9 years. Lets assume this one splits the difference and lasts a dozen years. If these trends hold then we can expect this bear to bottom around 2100 in current dollars sometime around 2034.

Bottom line is that the market needs to fall and fall a lot to get us back on the 3% + inflation economic growth trend line. I don’t think this “correction” is any where near worked out. Indeed, I’m quite concerned about my retirement prospects if we are in fact at the beginning of a secular bear market.

I respectfully disagree with the sentiment of this post. No one can predict the future.

I see 3 scenarios.

  1. We get a soft landing, and things go back to normal.
  2. We don’t get a soft landing, and we have a bad recession, but inflation is curbed.
  3. We don’t get a soft landing have a bad recession, and inflation persists.
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Bottom line is that the market needs to fall and fall a lot to get us back on the 3% + inflation economic growth trend line

Sorry, need clarification. What is the 3% plus inflation number referred to? The historical risk premium in the stock market is 6% + inflation. I’m confusing something …

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I see 3 scenarios.

1. We get a soft landing, and things go back to normal.
2. We don’t get a soft landing, and we have a bad recession, but inflation is curbed.
3. We don’t get a soft landing have a bad recession, and inflation persists.

And we still eventually get back to normal even if past our lifespans. The world isn’t going anywhere.

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PhoolishPhilip added to your Favorite Fools list.

I wish that there was a super-rec because your post is worth 10 of most ordinary rec’d posts.

Wendy

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Gimlet eye, not gimlet idea. :). I should reread the post before posting. :slight_smile:

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Gimlet eye, not gimlet idea

I don’t know; I don’t think a Gimlet is a terrible idea right about now!

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I suppose by the end of 1929, people were hopeful that the end of the bear correction was near, but it got worse and worse during 1930 and 1931 and it did not really recover until the early 1950s…

Does this mean you think we’re on the eve of a global Great Depression?

DB2

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Does this mean you think we’re on the eve of a global Great Depression?

No, but it also means that I think we may be on the eve of a global Great Depression. (Go not to the elves for advice for they will say both no and yes.) I really do not know. I do know that it happened before, and it took a world war and some other wars, to get us out of that one. And the world looks a lot like that this time, though none of us will survive if that happens. Also, if I really knew, especially the approximate amount and the date, I would not be posting here, but trying to make very different investments.

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Bottom line is that the market needs to fall and fall a lot to get us back on the 3% + inflation economic growth trend line
…
Sorry, need clarification. What is the 3% plus inflation number referred to? The historical risk premium in the stock market is 6% + inflation. I’m confusing something …

Talking about two different things.

Over long periods, the aggregate value of the US stock market can’t rise faster than its profits.
Over long periods, the aggregate profits can’t rise faster than the aggregate sales.*
Over long periods, the aggregate sales can’t rise faster than the GDP of the economy.**
Over long periods, the US economy doesn’t grow faster than inflation plus around 3%/year. Long term, it has been slower than that.

So, inflation plus 2-3%/year has been a pretty good estimate of the long run trend growth in the value of US equities.
This is why Mr Buffett’s simple market-cap-to-GDP metric for market valuation makes as much sense as it does.
Not perfect, but surprisingly sensible over long time frames.

However, this growth rate is not the risk premium, which depends on what bond yields are doing and
the real total return from stocks, neither of which is addressed by the logic above.

Nor is this growth rate the long run total return from equities, which is the growth in their real value above, plus the dividends you get each year.
(as an employee, your income every year is your income, not just the amount of your raise)
Historically average real total returns in the US have averaged around 6.5%, but that was
accomplished in periods with much higher dividend yields than recent years have provided.
The low dividend yields in the last many years have been made up for by a trend of rising valuations, but presumably that can’t go on forever.

So, there is another simple rule of thumb:
Assuming that equities stay as expensive as they are on your day of purchase, your long run return
from the broad market purchased today is very closely approximated by the current dividend yield (1.3%)
plus the real rate of growth of the economy (on the order of inflation plus 2-3%).

Jim

  • varies with unpredictable cycles in net margins and tax rates—but mean reverting over long time frames because profits can never exceed sales
    ** minor rounding error as export and import shares shift a bit, but it doesn’t change the general rule
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If this is our preferred measure of “value”, buckle up:
https://www.longtermtrends.net/market-cap-to-gdp-the-buffett…
We are still very, very expensive …

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If this is our preferred measure of “value”, buckle up:
https://www.longtermtrends.net/market-cap-to-gdp-the-buffett…
We are still very, very expensive …

I guess the only choice is “very” or “very very”.
Well, hmmm, maybe only the average since 1998 matters?
Not quite so bad then?

The main argument in favour of higher valuations in recent times is higher value: higher profitability due to higher net margins due largely to lower tax rates.
To the extent one thinks those effects will last, a one-time step up in valuation multiples of some size is warranted.
Though of course that seems already to have happened before the tax cuts, so maybe that doesn’t offer much solace.

Jim

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