Factors are Cheap and Expensive Versus 10 Year and 35 Year History
Value and Small Cap Cheap?
Age of Tech Companies Going Public in 1999 was 4; Last Year it was 12
Initial offerings could raise a record level of capital in
2019, potentially breaking the nearly $97 billion record set in 2000. But
Wainwright, and IPO investors, have returned wiser and more disciplined.
In a sense, the IPO market has simply grown up. For one thing,
the median age of tech companies going public in 1999 was four; last year, it
was 12. And having been burned in the bubble years by IPOs for wildly
speculative and ultimately failed businesses, such as theGlobe.com and eToys,
investors have tightened their standards. They now want established businesses
with substantial revenue and high growth.
The RealReal Is No Pets.com and
Today’s IPO Market Is Not the Next Dot-Com BubbleBy Eric J. Savitz
Passive investments control about 60% of the equity assets,
while quantitative funds — those relying on trend-following models instead of
fundamental research — now account for 20% of the market share, according to
estimates from J.P. Morgan.
Passive funds have attracted $39 billion of inflows so far this
year, whereas active funds lost a whopping $90 billion in 2019, the bank said.
It’s no secret that
machines are taking up a bigger and bigger share of investing, but the extent
of their influence is approaching shocking proportions. It is as high as 80%,
according to one major investing firm.
Passive investments such
as index funds and exchange-traded funds control about 60% of the equity
assets, while quantitative funds, those which rely on trend-following models
instead of fundamental research from humans, now account for 20% of the market share,
according to estimates from J.P. Morgan.
This means so much of
stock trading is now in the hands of automated buyers and sellers that the
market is increasingly sensitive to headlines and more prone to sharp price
swings, many notable investors believe.
Omega Advisors founder
Leon Cooperman previously said computer trading is creating a “Wild West” with the
markets, calling for an investigation by the Securities and Exchange
DoubleLine Capital CEO
Jeffrey Gundlach has taken a shot at passive investing, saying it is causing
widespread problems in global stock markets. He called it a “herding behavior.”
“I’m not at all a fan of
passive investing. In fact, I think passive investing … has reached mania
status as we went into the peak of the global stock market,” Gundlach said in December.
While algorithmic models
have gained popularity on Wall Street, low-cost passive vehicles keep raking in
assets from Main Street. Passive funds have attracted $39 billion of inflows so
far this year, whereas active funds lost a whopping $90 billion in 2019,
according to J.P. Morgan.
“The pace of outflows
from Active is at a cycle high while the pace of passive equity inflows has
bottomed and [is] beginning to reaccelerate,” Dubravko Lakos-Bujas, J.P.
Morgan’s chief U.S. equity strategist, said in a note on Friday.
Federal Reserve (Fed) will likely cut rates at its next meeting in late July.
This begs the question: Will the Fed really cut rates with stocks up so much
year to date and near all-time highs? “It might sound strange for the Fed to
cut rates with stocks up a lot for the year,” explained LPL Senior Market
Strategist Ryan Detrick. “But since 1975, the Fed has cut rates 26 times with
the S&P 500 Index up at least 15% for the year, most recently in 1995 and
Here’s the catch: A
year after those cuts, the S&P 500 was higher 23 out of 26 times—with a
very solid average gain of 13.4%. So it would appear monetary policy could be a
Ore. — Oregon is awash in pot, glutted with so much legal weed that if growing
were to stop today, it could take more than six years by one estimate to smoke
or eat it all.
the state is looking to curb production.
years after voters legalized recreational marijuana, lawmakers are moving to
give the Oregon Liquor Control Commission more leeway to deny new pot-growing
licenses based on supply and demand.
bill, which passed the Senate and is now before the House, is aimed not just at
reducing the huge surplus but at preventing diversion of unsold legal marijuana
into the black market and forestalling a crackdown by federal prosecutors.
harsh reality is we have too much product on the market,” said Democratic Gov.
Kate Brown, who intends to sign the bill if it wins final passage as expected.
is running twice as high as demand, meaning that the surplus from last year’s
harvest alone could amount to roughly 2.3 million pounds of marijuana, by the
liquor commission’s figures. That’s the equivalent of over 1 billion joints.
massive plot of land out in the frigid wasteland of the northern Yukon and
build a vast complex of unnecessarily poorly-designed buildings. There will be
no roads that lead there. No utilities. No central heating. And insufficient
staff to maintain the structure. I’ll then call it, “The Hall of Fame of Bad
It will be perfect. Because not only will
the hall itself be a bad decision, but anyone who ever attempts to visit it
will clearly be making a bad decision as well.
Inside the hall, we will have exhibits for
all of the worst decisions ever made. There’d be one for that time when Kodak,
despite owning 90% of the market share of the camera industry and inventing the
digital camera, decided not to sell them and went bankrupt as a result.
There will be another for the time when Decca Records passed on signing The Beatles because
they thought “guitar bands are on the way out.” There will be a whole wing for
stupid military leaders who tried to invade Russia. And we’ll have a special
“Tiger Woods” wing where we rotate in/out celebrities who wreck their own careers
by doing something exceedingly dumb.
It’ll be great.
And I guess, while people are there, we’ll
trot out a speaker or two and give seminars on how to not make such
awful choices. They’ll offer some principles on how to make better life
Maybe that seminar would go something like
VALUE AND BIASES
All tough decisions are essentially
about weighing values. There’s financial value, emotional value, social value, intellectual value, and
so on. You have to consider all of them, weighing them appropriately. And not
just in the short-term, but in the long-term as well.
As a general rule, we are all heavily biased
towards the short-term rewards and towards emotional value. We are biased towards our
pre-existing beliefs and protecting our reputation. And we’re also bad at
seeing long-term rewards clearly because it’s difficult to look past our
immediate fears and anxieties. Our emotions color everything we see.
Our “default” decision-making also makes it
incredibly painful emotionally to give up on something we’ve worked a long time
on, or to consider that we may have been wrong for years.
The fact is, we’ve all been wrong for years. We’re all wrong about
our value estimates. And until we can be honest about how wrong we were in the
past, we won’t learn to make better value judgments moving into the future.
Our “default” decision-making also
encourages us to avoid short-term failures, even if that means missing out on
No, the sweet spot in decision-making is to
find the short-term failures that enable the huge
long-term successes to happen in the first place. Because this is what most
people are bad at. And because people are bad at it, this is where most of the
2. LOSE ON
Ever hear those stories of wildly successful entrepreneurs and
how they had, like, 23 failed businesses before they made it big?
The lesson we’re all supposed to take from
this is that persistence and hard work is the key to extraordinary success.
And sure, whatever…
Usually, we can’t help but look at them and
think about how “lucky” they got.
I mean, Amazon! Who knew?!
What we don’t consider is that out of those
dozens of failed, half-baked business ideas were all wagers with limited
downside and extremely high upside. That is, if they lose, they lose a little.
But if they win, they win a lot.
Let’s say I gave you a pair of dice and I
told you that if you roll double ones, I’ll give you $10,000. But each roll costs
$100. How many times would you roll?
If you’re not bad at math, you would know
that you should spend all the money you have rolling those damn dice.
Most people look at each decision as a
single roll of the dice. They don’t think about the fact that life is a never-ending sequence of dice rolls. And a strategy
that loses a lot per roll can actually make you a big winner in the long run.
Yes, you will lose the dice game way more
than you win. But when you win, your winnings will far outstrip your losses,
making it a worthwhile wager.
You can apply the same “risky” behavior in
your life to achieve more optimal long-term results:
Propose “moonshot” ideas at work knowing that 90% of
them will get shot down, but also that if one of them gets accepted it
will be a huge boost to your career.
Expose your kids to difficult subjects at an early age,
knowing that most likely they won’t take to it. But if they do, it will
give them a huge advantage throughout their life.
excessively bold in your dating life,
stating exactly who and what you want, knowing that the vast majority of
people will not be compatible.
a bunch of difficult books expecting
that most of them won’t be useful or comprehensible to you, but also that,
occasionally, one will completely change your life.
Say yes to every invitation knowing that most of the
events/people will be kind of dull and you’ll just go home early, but that
occasionally you’ll meet someone really important or interesting.
When you think purely in terms of the
immediate result, you cut yourself off from the biggest potential gains in
life. And the reason most of us do this is because of our pesky emotions. Our emotions are short-term biased.
They are obsessed with the present moment. And this prevents good
3. TREAT YOUR
EMOTIONS LIKE YOU’D TREAT A DOG
Here’s one thing I’ve noticed over the
years: shitty dogs almost always have shitty owners. The dog’s level of
discipline is reflected in the owner’s emotional maturity and self-discipline.
It’s very rare to see a dog that’s wrecking the house, eating all the toilet
paper and pooping all over the couch and the owner has
their own shit together.
This is because our connections with dogs
are purely emotional. And if we suck at dealing with our own emotions, then
we’ll suck at dealing with our dogs. It’s that simple. If you don’t know how to
limit yourself and tell yourself “no” when necessary, then, well, don’t get a
dog. And if you do, don’t fucking move into my building.
Our emotions are kind of like our dog that’s
living inside our head. We have this part of ourselves that just wants to eat,
sleep, fuck and play, but has no conception of future consequences or risks.
That’s the part of ourselves we need to
Our emotions are important. But they’re also
kind of dumb. They’re not able to think through consequences or consider
multiple factors when acting.
Our emotions overreact to things by design.
They evolved to keep us alive when we were hunting water buffalo on the
savannah and shit like that. When we’re scared we want to run away or hide.
When we’re angry we want to break stuff.
Thankfully, our brains evolved logic and the
ability to consider the past and the future and all that great stuff. That’s
what makes us humans. And not dogs.
The problem is, our “dog brain” is actually
what controls our behavior. You can intellectually know that eating ice cream
for breakfast is a bad idea, but if your dog brain wants fucking ice cream for
breakfast, then that’s ultimately where your body is going to go.
It’s only by training your dog brain with
your people brain, “No, bad Mark, ice cream for breakfast is bad, go do
something else that feels good and is healthy,” that your dog brain
Do that enough and you have a well-behaved
Emotions are great for giving you that umph
of passion and spirit, the same way a dog is great
for running and fetching stuff and being a great friend and barking when
someone weird is hanging out by your bedroom window.
But the dog is limited. It needs context and
direction to behave well and function. And that’s your job as the dog owner.
Similarly, your dog owner brain must train the dog brain to sit down and shut
up when necessary. You must give yourself context and direction. Train yourself
to adopt the correct habits and make better
decisions. Reward and punish yourself.
Love your dog brain (i.e., love yourself),
accept your dog brain (i.e., accept your emotions), but also discipline them.
And every once in a while, indulge yourself…
that’s a good boy. Yeah, who’s a good boy? Who’s a good boy? Yes, you’re a good boy.
4. OPTIMIZE YOUR
LIFE FOR FEWEST REGRETS
Regret is sometimes called a “rational
emotion” by psychologists. And not really because regret itself makes us more
rational—at least not directly—but rather the way we predictregret is often done
in a rational-looking way.1
In making decisions, we’ll often consider
the options available to us, imagine our future selves after choosing one of
these options, and then try to feel how much regret we experience in this
simulated future state. We then run this simulation again, choosing a different
option, and compare that simulated state of regret/non-regret to the others.
This ability is both a) fucking amazing when
you think about it and b) incredibly useful as long as we use the most accurate
and complete information available to us (by using all the ideas we’re covering
here, of course).
Similarly, a lot of us love
envisioning massive success. But
if we ask, “Would I regret never having that success?” usually we find that the
answer is “no.” Only when it’s “yes” should we probably make the sacrifices to
Sometimes, the right decision becomes
crystal clear when put into these terms. Legend has it that Jeff Bezos left his
cushy, high-paying job to start Amazon because it was so obvious to him that
he’d regret it if he got old and didn’t at least try this whole
“internet thing.” Staying at his job, on the other hand, carried a lot of
future regret that was apparently quite palpable for Bezos.
I personally know a lot of people—myself
included—who ultimately made big life decisions largely based on the path of
least regret. These decisions are almost always described as the best decisions
they’ve ever made. Go figure.
Instead of basing your decisions around
success/failure, or happiness/pain, base them around regret avoidance. Our
regrets are usually the best measurement of what is actually valuable to us in
5. WRITE SHIT
The best way to help you sort out all of
your emotional drivel from actual decision-making is to write things down.
Writing things down is a simple but powerful
way to clarify everything that’s swirling around in your head. I get emails
from readers all the time with long screeds about the issues in their lives
only to have them say at the end that they don’t need a reply because writing
it all out was so cathartic and revealing for them.
The act of writing forces you to organize
and make concrete all the emotional turbulence swirling around in your brain.
Vague feelings become structured and measured. Your self-contradictions
are laid bare. Rereading what you write reveals your own logic (or lack
thereof). And it often reveals new perspectives you hadn’t considered.
And when it comes to mulling over a
decision, there are a few specific things you can write about to help you if
you’re having difficulties:
What are the costs and benefits? First,
take some time and do a good old-fashioned cost-benefit analysis of your
decision. But don’t just do the old-fashioned “pros” and “cons” list. Add
a couple more columns. Separate your “pros” into both long-term and
short-term. Add a column for regrets associated with each decision. And
note if there is any long-shot potential for success (see Principle #2).
What is your motivation behind the decision and is that a
value you want to cultivate in yourself? All
the decisions we make, big or small, are motivated in some way or another
by our intentions. Sometimes this is very straightforward.
Last night, I was
motivated by hunger to eat something and there was a burrito in front of me, so
I shoveled it into my face hole.
Sometimes it’s not
so straightforward though. Problems arise when our intentions a) aren’t very
clear to us and/or b) conflict with our core values.
For example, are you
buying that car because you would genuinely benefit from owning it, or because
you’re trying to impress the people around you?
Or are you filing
for full custody of your kids because you think it’s truly in their best
interest, or are you trying to get revenge on your ex after finding out they
are dating someone new?
If you identify some
ulterior motives when weighing a decision, stop and ask yourself if your
intentions align with who you want to be.
And if you’re asking
yourself, “Well shit, I’ve never thought about who I want to be. What
should I do?” Then I think you should take out a fresh piece of paper and start
writing that down.
For instance, here’s my Horrible Decisions
Hall of Fame Table:
Pros * It’s funny
* Oh, Canada!
* Get to research celebrities with hookers
Cons * Expensive
* Lot of work
* Really, really far away
* Joke is only funny for so long
Long-Term * Illiquid asset
* Seriously, when am I ever going to
travel to this thing?
* For the rest of my life, I’ll be the
“Dumb Hall of Fame” guy.
Potential Regrets * DOING: Tons, lost time, money, etc.
* NOT DOING: Uhh… none, really.
Rep. Value * Do I really want to dedicate a huge
portion of my life and legacy to being a clever smart ass? Probably not.
So there you have it. No “Horrible Decision
Hall of Fame.” Why? Because it’s a horrible decision.
HOW TO KNOW WHO YOU REALLY ARE
We all think we know ourselves well, but psychological studies
show otherwise. In fact, most of us are somewhat deluded about ourselves. I put
together a 22-page ebook explaining how we can come to know ourselves better,
just fill out your email in the form.
You’ll also receive updates on new articles, books and other
things I’m working on. You can opt out at any time. See my privacy
I’ll tip my hat to the new constitution Take a bow for the new revolution And smile and grin at the change all around Pick up my guitar and play just like yesterday Then I’ll get on my knees and pray We don’t get fooled again, don’t get fooled again, no no no no Yeah Meet the new boss Same as the old boss
Songwriters: Pete Townsend Produced by: The Who
Don’t get fooled again by rising interest rates doomsayers.
The yield curve just inverted for the first time since 2007—short term rates are now higher than long term rates.
There’s typically a 17-month lag between a yield curve inversion and the start of a recession.
The curve did not stay inverted very long further confusing outcomes.
Markets tend to perform well during the post-inversion lag period–but stocks eventually draw down when the economy contracts.
Stick to your plan. Ignore the media. Buy when things are cheap and take lower but acceptable returns.
The Yield Curve Inverts
In 2007, I was in China and purchased a statue of a bull for my home office. The statue arrived via FedEx with a crack down the middle. Little did I know that crack would be an eerie warning of the 2008-09 financial crisis—the most punishing global recession we had seen since 1929? I’m not superstitious, but a more traditional recession indicator flashed negative soon after my damaged shipment arrive from the Far East–the yield curve had “inverted.” In other words, rates on long-term (10-year) Treasury bonds were actually paying investors less than short-term (3-month) notes were. As we’ll see in a minute, this phenomenon has happened at least five other times over the past 40 years, and each time a recession has followed.
A similar inversion just occurred at the end of March 2019 while U.S. stock markets had rebounded nearly 20-percent from a recent bottom and the bond markets were on a win streak as well. Does that mean another recession is looming? Quite likely it is, but there are some important caveats to consider in terms of timing, severity and what you should do with your portfolio. The markets like life are never easy.
First, it’s important to remember that not everyone uses the same definition of “inversion.” Like the San Francisco Fed, I consider it to be when the yield on 3-month Treasuries is higher than the yield on 10-year Treasuries. According to the Cleveland Fed, inversions of that 3-month/10-year spread have preceded each of the past seven recessions, including the 2007-2009 contraction. The Cleveland Fed acknowledged there have been two false positives — an inversion in late 1966 and a “very flat” curve in late 1998.
What does the yield curve really mean?
The 10-year rate is set by market supply and demand as investors determine the equilibrium point of where that 10-year rate should be. But, the 3-month rate is set not by market forces, but by policymakers at the Fed. As the old saying goes, when investors are scared, they run to the 10-year and when the Fed is scared it raises short-term interest rates. These two forces collide to invert the curve. As a result, when short-term rates are higher than longer term rates, investors are indicating that they’re cautious about the future of the economy and they don’t want to tie up their money.
Yield Curve is Not a Timing Mechanism
The problem with using the yield curve blindly as a recession indicator is that there is historically a lag of 10 to 24 months between when the yield curve inverts and when the economy limps into a recession (see below). More importantly, you don’t want to head for the hills immediately because markets tend to perform very well during that initial post-inversion lag period to the tune of PLUS 15 percent on average (see subsequent chart). Here are the start dates for the five previous inverted yield curves along with the beginning of the ensuing recessions:
As you can see, there has been a substantial lag from the time of the inversion until the start of the recession in each of these instances. The average number of months was 17, meaning it took about a year and a half for the economic slowdown to hit after the yield curve inverted. Again, history shows that markets tend to perform very well in the initial year or two following an inversion.
As mentioned earlier, the average return during these lag periods was a gain of more than 15 percent. There was just one downturn which occurred after the dot-com bust in the early 2000s. Although the stock market doesn’t need to see a recession for a large correction, it’s a safe bet that an economic contraction will lead to a draw-down in stocks.
What does it All Mean?
I know what you’re thinking: “Thanks Matt. You just hit me with a bunch of financial gibberish that I don’t understand and have thrown out some conflicting signals.” I’ll make it easy: It appears we have our first serious recession signal in over a decade, so we should take this indicator seriously. However, the other Fortis recession signals are not yet flashing red:
Wage growth is still below 4 percent.
Inflation is not accelerating.
Initial jobless claims are not rising, and
Inventories are up, but not at recession levels.
Bonus factor- the yield curve only stayed inverted for a couple days.
Our 4th Quarter Letter encouraged investors to be aggressive and take advantage of the near 20 percent correction in the markets. Over that time, as U.S. market valuations pulled back to median levels, we said the probability of a significant rally following a bad quarter would be quite high (see below grid). We followed that Q4 letter with our first webinar for investors that discussed in greater length the opportunity at hand. As most of you know, the first three months of 2019 ended up being the best quarterly return for the Dow and S&P 500 in a decade.
While we can’t avoid a recession forever, we’re not likely to endure a downturn as punishing as we had in 2008. Bank balance sheets are in rock solid shape. American citizens have been cutting debt aggressively, resulting in stronger personal balance sheets than we’ve seen in many years. But we have to be disciplined, because the probability of a cyclical recession is rising and there is a strong likelihood of lower portfolio returns after a decade of euphoria.
At this point, employment numbers can’t get much better–we have more jobs available in the U.S. than eligible unemployed citizens. As is usually the case with markets, unemployment numbers are counter-intuitive: The time to invest is when unemployment is high. When unemployment is high, stock valuations are usually low and no one is buying equities. As Warren Buffet always says: “Stocks are the only thing people don’t buy when they are on sale.”
I am sure you thought this Quarterly Letter’s theme (“Don’t Get Fooled Again,”) would be a warning about the next 2008. It’s actually about the probability of interest rates going higher. One of the reasons the yield curve inverted is because the Fed was raising short-term rates at a time when the rates on longer term 10-year Treasuries were falling. As I mentioned earlier, short term rates are driven by Fed policymakers, while long-term rate are driven by market forces.
The chart below shows that estimates for rates under “preferred conditions” have dropped from 3.5 percent in 2018 to 2.5 percent in 2019. Further, there is ample speculation about a rate cut in 2019.
Historical S&P Returns when Unemployment Low
Estimate of Fed Policy Going Forward
Think of Fed Fund Futures as a Betting Line
The line has now moved heavy in favor of a rate cut in 2019.
Global Bond Yields Slide to Fresh Lows Following ECB Comments
For 25 years, economists have been predicting doom due to rising interest rates. Here we are again with mortgage rates near historical lows. I am already trying to teach my kids that betting on sports is a loser’s game, but an even biggest loser’s game is making bets with your money based on expert predictions about interest rates. “Don’t get fooled again.
Since 1992, Economists Have Predicted Higher Interest Rates. How did that work out?
If you do not believe me, here are Warren Buffet’s comments from his latest Berkshire Hathaway shareholder letter???
Equity investors have enjoyed a historic run over the past decade, and now it appears we have our first serious signal of a downturn. Again, the inverted yield curve is not a timing mechanism, nor is it a 100-percent reliable recession indicator. We also have a de-levered banking system and a de-levered high-net-worth population in the U.S.
America’s wealthiest households are stashing their cash at record levels. The top 1-percent of households now have three times more money in readily available cash than the bottom 50-percent holds! The 1-percenters have about 20-times more in cash today ($304 billion) than they did before the last recession ($15 billion) according to Federal Reserve data released last week.
We are blessed to live during a dynamic time in U.S. history. Bull markets are getting longer and bear markets are getting shorter. Most of us endured a once-in-a-lifetime recession in 2008, but came out with a record setting bull market run. When the the next recession arrives, it will most likely follow the same path as shown in the chart below.
For investors who are net savers, over the next decade, you should welcome the recession as an opportunity to buy stocks on sale. I am a firm believer in Warren Buffett’s American Tailwind theory: “Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky-gloriously lucky-to have that force at our back,” quipped Buffet.
I recently watched Springsteen’s fabulous Broadway performance on Netflix, having seen The Boss over 20 times myself, it still was unreal to hear him tell personal stories around growing up and his career. As I watched one of the most volatile stock market year ends in history, I couldn’t help but apply investors psyche to a Springsteen song. Most investors got Blinded by the Light, it was just too easy, buy FANG stocks, buy S&P index, buy anything. After 2017 being one of the least volatile years in market history including no drawdown of S&P over 3% versus historical annual average drawdown of 14%, the market sent a giant wake-up call that investing is always emotional including an all-time record almost 3% Christmas Eve smack down. Here’s the good news, it seems she (market) is going to make it through the night as she always does, it’s not 2008 or anything close, we have some wood to chop in the short-term but valuations are reverting to mean.
2018 was a historic year for financial markets in more ways than one-first time in 27 years that stocks and bonds were both negative in the same year, worse stock market December since 1931, over 90% of investable assets were negative in 2018, and no asset class returned over 5% for the first time since 1974.
A Record Share of Asset Classes Posted a Negative Return in 2018
Investors felt pain this year across the board as diversified portfolios were nowhere to hide, in fact some well diversified holdings returned less than the S&P due to exposure to bonds, commodities, international stocks and U.S. small cap stocks. Three of these groups were down more than the S&P and most bonds were flat to negative. The tradtional 60/40 model was negative for the year with returns coming in 13% below historic median, if you’re 60/40 was global returns were even lower. Target Date funds are popular and growing especially in 401k plans, see below as they are posting first negative returns in 10 years.
Diversified Portfolios Big Red Year – Target Dates Down for First Time in Ten Years
In my first quarter 2018 letter I wrote at length about tech facing its Machevellian moment in the next 12 months, mentioning that a small cadre of tech stocks were responsible for most of the markets gains which is unsustainable. But the bigger problem was the market was due for sector rotation especially since traditional defensive sectors of market hit record low capatalization in the S&P even lower than 1999 or 2008. This sector rotation back to defensive certainly started in the 4th quarter now the question becomes how long will it last?
As popular stocks and sectors started to crumble, retail investors as in the past started to get emotional, including pulling a calendar-month record $98 billion from U.S. based stock funds in December. In fact it was almost double the previoius record of $48.8 billion in October of 2008. As anyone who has read my thoughts in the past knows, investors are terrible market timers.
Investors usually sell in market panic downturns and buy when they are blinded by the light of euporia. But as you can see from the chart below, selling during bad quarters can cost you, buying during bad quarter has proven profitable on 1yr, 3yr and 5 year periods.
The good news is that markets will most likely, like Springsteen says, “make it thru the night.” Banks balance sheets are in good shape as are household balance sheets, the debt overhang this time around is corporate debt and private lending, not enough to spark another 2008. This could leave us looking at a bear market without a recession or a cyclical bear market within a longer-term secular bull. The good news on these two scenarios is that the pain will be short-lived. For anyone who is a net saver for the next 5-10 years or more, buying opportunities will present themselves as some are already coming to fruition.
See chart below the length of bull markets versus bear markets, especially some of the shorter corrections or cyclical bears.
History of U.S. Bear and Bull Markets Since 1926
How about returns for the market after bad quarters and months like December? The market actually has impressive returns on a 1 year, 3 year and 5year basis after a 4th quarter like 2018. If you strip out the American depression years, last quarter was the top 10 worse quarter in stock market history. So we should run for the hills right, contrary to the natural emotional response, instead we should channel our inner Warren Buffet and stay to a disciplined system for the long-term.
The good news about market sell off is that valuations naturally come down, as you can see in the following chart, S&P price to earnings ratios have pulled back to the mean. Even though investors and the media love to talk in terms of the S&P, diversified portfolio holders invest internationally, across market caps in U.S., in commodities and real estate. The even better news is some of these non-S&P asset classes are trading at 25 year lows. Value stocks are at record discounts to growth stocks in the U.S., International stocks are trading at half the fundamental valuation measures of U.S. growth stocks and commodities are at a 25 year low valuation to the S&P. The idea that all asset classes are expensive after this 10 year bull market is fake news.
S&P Valuations Trading Below 25 Year Average P/E
Value Stocks and International Stocks Trading at Discount to U.S. Growth Stocks.
Global Valuations as of 12/17/18
Diversified portfolios generally work well over the long-term but they are sometimes painful to hold in the short-run. The last 10 years have been an S&P dominated investment environment, this has left some asset classes behind resulting in cheap valuations. Investors that are net savers for the next 10 years now have an opportunity to invest more aggressively at more attractive valuations. As one of our earlier charts indicated most investors are selling, historically this has been the best time to buy and post bad quarters data also puts probabilities in your favor for a 3-5 year horizon.
Investors should expect more volatility in the first quarter as company earnings hit the tape and the market decides whether this is a correction of something bigger. Valuations in many asset classes have already priced in something bigger but as the song goes “she will make it through the night.” As I like to remind readers in most letters, the S&P 500 has experienced twelve 20% corrections in the last 70 years and it’s returned 15,000%. I believe investing is a psychology game not an IQ game, I suggest you keep your emotions in check and stick to your plan.