September Stock Market Selloff? 220903

You’ve probably already seen the headlines: September is the worst month of the year for stocks.

True, but how significant? Not much.

The below chart illustrates that over the past six years, two years were down (~-3.5%) and the other four years where either flat or up.  There is a seasonal pattern that implies underperformance for the month of September, but on average, it’s inconsequential.  Since 1950, the average performance for the month of September was 0.54%. 

What will happen this time?  I have no idea, but my cynicism leads me to speculate that the stock market will improve ahead of the midterm elections.

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Resilience of Long Term Moving Average 220815

It’s been a challenging year for the Stock Market.  The attention seeking Media was happy to point out that the “S&P 500 suffered its worst first half of a year since 1970.”

Less reported is the fact that following the dismal 1970 first half decline, the S&P 500 bounced 33% from the low to finish the year with a total positive return of 3.94%.

So far, 2022 is rhyming with 1970.  The major indexes have made up more than 50% of their losses.  That doesn’t mean they’ve bounced 50% from the low, but that they’ve retraced more than half of the peak-to-trough decline.  This is important, because from a historical statistical perspective, the odds of a drop all the way back down to the low is HIGHLY unlikely.

Another reason to believe that the lows have been put in, is that the NASDAQ & Small Caps have “technically” started a new Bull Market uptrend.  That’s because both indexes have bounced more than 20% from their recent lows.

So the question on every foolish investor’s mind is, “will this uptrend hold?”

I have no idea, but here’s a suggestion:  FOCUS ON THE LONG TERM.

Note the below chart, where both large & small cap stocks are represented.  Notice that regardless of short term volatility, the long term moving average acts as support.  Over the past nearly two decades, the only occasions the long term moving average has been significantly breached was during the 2008 Financial Crisis and the 2020 Pandemic.  In all cases, the indexes have ALWAYS recovered and gone on to set new record highs.

So to me, the relevant question is never, “will this uptrend hold?” but rather, “did you buy the dip?”

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GDP is on trend 220730

There was lots of chatter this week about two items.  Item one is a reality.  Item two is babble.

The reality is, over the past six weeks, the S&P 500 is up over 13%.

The babble is, is the economy in a recession?

The explanation for both items is that GDP is trending back to its norm.

GDP growth over my long and wonderful lifetime has averaged 3%.  However, it’s only been 2% over the past couple decades.  And since 2020, it’s had extreme fluctuations, which have all been artificially induced.  (Given the global Crony Capitalist Statist Fascist economy that exists, “artificially induced” is a relative term.)

The 2020 excessive GDP decline of 3.4% was caused by government shutdowns.  The 2021 excessive GDP growth of 5.7% was caused by government largess.  This year’s lack luster GDP (estimated at 1.7%) is below trend, but well within norms.  Post 2008-2009 Housing Crisis Great Recession, GDP has been slightly above or below 1.7% nearly 38% of the time.  Today’s economic reality is neither hot nor cold, it’s status quo blasé.

Depending on future government intervention (the Midterm elections could result in two years of gridlock…my favorite form of democracy) GDP growth will very likely return to its 21th Century trend of 2% which has resulted in S&P 500 annualized growth of about 7%.

People that panic and sell during downturns never achieve those very sustainable growth rates of 7%.

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IMPORTANT: shift in monetary policy narrative 220620

This is IMPORTANT…but I’m being redundant because everything I blog about is important, otherwise I wouldn’t blog about it.

The Federal Reserve is starting to walk back its tough talk on fighting inflation with higher interest rates.  As I’ve previously mentioned, tightening monetary policy won’t pump any Oil, nor grow any Wheat.  The recent dramatic price increases in Energy & Food are a direct result of the Ukraine invasion and have little to do with Pandemic monetary policy excess.

I continue to believe that we’re in a post-Pandemic transition, not inflation.  Prices for many assets have long ago peaked, and even Energy & Food prices are mitigating:

Asset                  Peak Date                        Decline

20 Yr Trsy TLT    3/9/2020                         -37.62%

Lumber               5/3/2021                         -65.26%

Steel                   5/5/2021                         -25.17%

Bitcoin                11/9/2021                       -69.76%

Coffee                 2/9/2022                         -12.02%

Copper                3/6/2022                         -19.76%

Oil                       3/6/2022                         -16.09%

Gold                    3/6/2022                         -11.20%

Wheat                5/17/2022                       -10.84%

Prior to the Ukraine invasion, Gold, Copper and Oil had all peaked, 8/2020, 5/2021 & 10/2021, respectively.

Until last week, the FED has been curiously complacent in promulgating the Media narrative that post-Pandemic inflation is rampant, FED policy is to blame, and tighter monetary policy will fix it.   Chairman Jay Powell has started to walk back that narrative.  In terms of what’s driving inflation and whether monetary policy can remedy it, he recently stated, “I think that what’s becoming more clear is that many factors that we don’t control are going to play a very significant role in deciding whether that’s possible or not.”

I interpret his statement to reinforce what I’ve previously believed- monetary policy will tighten only enough to get back to pre-Pandemic norms.  Meaning that the economy will slow down from Pandemic era induced excessive 6% GDP growth; but monetary policy won’t be so restrictive as to cripple the healthy part of the economy.   

Watch for the “narrative” to start highlighting healthy parts of the economy and stock market.  Valuations are extremely favorable, in the case of Small Caps, by some estimates they’re at the best levels in over 20 years. 

Now that the Media has scared everyone into capitulation, expect to start seeing more headlines like the one that appeared yesterday in Barron’s:  “Small-Cap Stocks Have Gotten Crushed. Watch for Them to Rebound Soon.”

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Cynical Realpolitik 220612

The selloff late last week put an end to what could have been a three-week recovery.  Stocks started to collapsed ahead of the May inflation report, which was “higher than expected”. 

Expectations are much like “policy”, both can change very abruptly.  I’m less concerned about inflation than most, because I believe that the current inflation surge is due to the Ukraine Invasion and not because of Federal Reserve monetary policy.  Oil prices could collapse as quickly as they rose, given favorable policy decisions.

My optimism is based on “realpolitik” cynicism.  It’s not in the Establishment’s best interest to have extremely high energy or food prices; therefore, I expect policies to moderate.  Abrupt changes which could mitigate Russian sanctions (cease fire, negotiation, détente, price caps, export bans) would also cause abrupt upward moves in the Market.  Over the long term, I see being in the Market less risky than being out of the Market.

US corporations are favored by established long term trends of automation, technology, industrial reshoring & demographics.  They emerged from the Pandemic stronger, and I’m betting they’ll do just fine in the aftermath of this current crisis. 

Where are the future opportunities?  Just like Oil stocks two years ago, future appreciation can be found in companies that offer growth prospects at reasonable valuations.  As an example, if you believe in an expanding US manufacturing and industrial base, then consider the following quality industrial companies: AYI, CAT, GNRC, GTLS, HON, JBT & PH.  None of these are currently in my core holdings, but they do screen very favorably. 

Having a long term growth perspective is always easiest when the Market is going up…it takes a steely eyed investor to be optimistic during a sustained selloff.

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