Greetings & an early Happy March Madness.
It has been a while since we shared our thoughts on the markets so, all things considered, we felt it was time to reach out.
Our last note was in the middle of the ‘Regional Bank Crisis’ last March as several banks were melting down, for various reasons. Since then, the Regional Bank Index is +20%ish while the ‘Big Bank’ index is +25%. Buying in the middle of those types of ‘storms’ is historically a smart move.
As a team we spend time on a weekly basis sharing economic, market, sentiment, and technical news/facts/history. Accordingly, we’ve stayed bullish over the last year (+) and continue to stay fully invested. Today we’d like to share a few reasons why we are still optimistic.
First, it’s worth noting 2022 was an outright disaster in the financial markets. At one point, the S&P500 was down over 25% with the Nasdaq down 33%. Bonds had their worst year EVER, by far, as the Fed was trying to fight the inflationary pressures brought on by the COVID pandemic, and the monetary policy that came with it.
We bring up 2022 simply to recognize how difficult it can be to stay invested and believe in the markets while the news is still fairly terrible, and the ‘sting’ of a bear market is fresh. Coming out of the 2009 bear market (S&P500 -55%) the economic news really didn’t turn until the Summer of 2010. By then the S&P500 was +65% from the March 2009 lows. The market lost 35% in 5 weeks when COVID hit in March of 2020. Few believed the markets would fully recover by late summer, just 5 months later, as the pandemic lasted well into 2021.
The past 18 months have been similar to those previous bear markets. After going thru a very extended period of (mostly) 0% interest rates (2008-2021), the market reaction to the Fed raising short-term rates to over 5% was understandably extreme. Banks didn’t hedge properly. Immense pressure in the Real Estate market scared many. However, scared is not an investment strategy. And the U.S. economy has stayed remarkably strong and seems to be in solid shape.
Speaking of economic strength, something we’ve discussed many times over the last year is ‘soft’ data vs. ‘hard’ data. When it comes to the economy, things like surveys, opinions, attitudes, and polls are referred to as soft data. Soft data reflect what humans think, expect, believe, and/or are scared of. It is often driven by emotions and/or unknowns. Soft data has been WEAK for the better part of the last 24 months.
On the other hand, hard data is factual. Hard data reflects the actual results of what is really happening in the U.S. economy. For over a year, the hard data from our economy has slowly gotten better. Manufacturing is up and continues to climb. Real income continues to outpace inflation. Gross margins are strong. Corporate earnings are rising. And the financial markets reflect those facts, as they should.
Meanwhile – and this is very normal – we continually receive emails/texts/calls voicing concern about a market crash, “what’s coming”, “the recession”, etc. Again, this is normal. But we just don’t see it. The data doesn’t point in that direction. And, most certainly, the markets don’t either. A recession seems unlikely – we basically had one in the 1st half of 2022. The bank sector is healthy. Construction spending is keeping pace. Housing is incredibly strong, although for different reasons than in the past. Unemployment is very low.
Are we surprised by all of this? Sure, we’re human too. Interest rates had us spooked. But capitalism works. And market history matters. Markets usually go up. We get smacked around every few years, but markets are undefeated over time. This time is not different.
Speaking of this time is not different, we all know there is a Presidential election in 8 months. The entire globe is fully aware of this. It isn’t news. Half of the country will be mad when it’s over. Many will be scared leading up to it. We’ll discuss previous election cycles in future correspondence but trust us, we’ll get thru November 2024. The markets care very little about politics.
Another reason to stay positive in 2024? You guessed it: The Presidential Election. Going back to the 1950s, in year 4 of every sitting President’s first term, US stock market returns have been positive. Said another way, every administration has pulled out all the stops, economically-speaking, to try and get re-elected. We like those odds for 2024.
Two more thoughts on market history. First – and this gets nerdy/technical – but there is something called a ‘Zweig Breadth Thrust’ (ZBT). Think: a VERY Powerful, VERY Positive UP move in the stock market where almost ALL stocks rise in a BIG way. These Thrusts usually happen at very surprising times. We have had 17 ZBTs since World War II &, so far, we’re 16-0. #16 was on November 3rd of 2022. Each of the previous 16 times, the market has been positive 6 months later (avg +15%) AND positive 12 months later (avg +23%). The last one (#17) was on 3/31/23 and is looking very solid as well.
One more: Going back to 1936, when December, January, and February are all positive months in the U.S. Stock markets, that year’s return has been positive. 25-0 over the last 25 occurrences, with an average return of 16% for the year. We like those odds too.
We’re optimistic. Always concerned but never scared. The above are the types of conversations we’re constantly having (monitoring) amongst ourselves. We don’t share all of it because we don’t want to add to the never-ending noise that already fills our lives.
To be clear, just because good things have happened historically does not mean this year will be a joy ride, or there are any ‘certainties’. We know that and you should too. 2024 has gotten off to a solid start but we are expecting typical Spring/Summer volatility and we’re more comfortable putting cash to work during inevitable pullbacks.
Thank you and please don’t ever hesitate to reach out with questions/concerns.
Sincerely,
Your LJI Team