Three warning signs the stock market is overdue for a sharp correction

While the S&P 500 (SPY) and NASDAQ (QQQ) have been on tremendous bull runs since 2023, there are three historically reliable warning signs emerging simultaneously that indicate that the market could be due for a significant correction in the near future.

The first warning sign is that valuations and equity exposure are at stretched levels. In fact, the S&P 500 has gotten so overvalued that Howard Marks recently pointed out that J.P. Morgan research reveals that whenever the S&P 500 has reached its current valuation level, the next decade has always yielded real annualized total returns of around 0%. Additionally, there are numerous other metrics that indicate the S&P 500 is significantly overvalued right now.

Not only that, but the positioning of market participants is also indicating a very bullish, if not complacent, market sentiment. For example, household allocation to equities has reached near-record levels, and this has typically indicated that the market is late in a bull-run cycle. This makes sense simply because, from a mechanical perspective, the more people in the market, the greater the number that could be pulling out, or at the very least withdrawing their positions relative to new entrants and new additions being made. Not only that, but margin debt is at elevated levels. This typically indicates that investors are feeling too optimistic about the market and, should sentiment turn, could lead to an outsized downturn as investors flee to safety by closing margin positions, leading to outsized selling.

The third warning sign is an inverted yield curve. This is an important indicator because, while an inverted yield curve does not mean that a recession is guaranteed to happen, historically, yield curve inversion has been a very reliable indicator of an upcoming economic recession, as the chart below illustrates.

Given that the yield curve recently inverted quite sharply, that means that we may well be in store for a recession. This is because yield curve inversion tends to signal that monetary policy is too tight and, therefore, credit creation slows. This, in turn, can lead to both a stock market correction and a contracting economic environment. It also signals a risk-off environment because it means that investors are fleeing to longer-term bonds (TLT), which are traditionally a safe haven, as a way of hedging against a sharp economic downturn.

Sure, there is a bullish case for the market today, namely that we are on the cusp of an AI productivity boom as well as a manufacturing renaissance in the United States, both of which, if successful, could lead to enormous gains in economic activity, and where manufacturing-related job increases could help to offset some of the lost jobs due to AI. Additionally, the one big beautiful bill act from last year implemented tax and regulation changes that are overwhelmingly pro-business in nature.

However, as these indicators show, there is a strong case to be made for a sharp stock market correction, whether it be due to a recession, as the recent inversion of the yield curve seems to point to, or simply due to the fact that markets are overvalued and overleveraged. At the very least, with valuations and leverage at the levels they are at, any sort of speed bump, the AI boom, and/or material disappointment in economic activity in the United States could send markets substantially lower.

Buffett going quiet

Warren Buffett, in his annual message as CEO of Berkshire Hathaway to shareholders – a tradition dating back to 1965 – said that he will be “going quiet” after he steps down at the end of this year. But the 95-year-old is not going away just yet.

Buffett will no longer write the message atop the company’s annual report, but he will continue to deliver an annual Thanksgiving message, and he will “step up” his philanthropy, giving away the $149 billion in Berkshire Hathaway stock he continues to hold.

“The Oracle of Omaha” has become an investing icon, a billionaire who has cultivated a folksy image, particularly through his letters to shareholders. Although his market moves are closely followed by investors around the world, Buffett has also worked to present himself as a cheerleader for America and ordinary Americans – and for capitalism.

He is being replaced by Greg Abel next year. Abel, 63, is the vice chairman of non-insurance operations of Berkshire and was designated as Buffett’s successor in 2021.

Buffett once again praised his successor, writing that he “has more than met the high expectations I had for him when I first thought he should be Berkshire’s next CEO.”

Buffett also gave an update on his health, admitting that to his “surprise, I generally feel good. Though I move slowly and read with increasing difficulty, I am at the office five days a week where I work with wonderful people.”

But the nonagenarian isn’t getting any younger. Acknowledging the limited time he has left and the giant sum of money he wishes to give away, Buffett said he converted 1,800 shares, worth a combined $1.35 billion, into the company’s cheaper “B shares” and delivered them to four of his family’s foundations Monday.

“To improve the probability that they will dispose of what will essentially be my entire estate before alternate trustees replace them, I need to step up the pace of lifetime gifts to their three foundations,” he said.

Buffett says he has high – but realistic – expectations that the conglomerate he led for six decades will continue to thrive after he steps down as CEO. Berkshire Hathaway (BRK.B) shares have risen more than 10% this year, with the company sitting on a $1 trillion market cap.

“In aggregate, Berkshire’s businesses have moderately better-than-average prospects, led by a few non-correlated and sizable gems,” he wrote. “However, a decade or two from now, there will be many companies that have done better than Berkshire; our size takes its toll.”

The oracle and his ice cream

Buffett has managed to become a symbol of two seemingly disparate things over his decades in the spotlight: a relentless dealmaker and capitalist, wrapped up in an avuncular figure dispensing practical advice.

Berkshire Hathaway’s annual meetings are like those of no other company, dubbed Woodstock for capitalists, with an exhibit floor showing off many of conglomerate Berkshire Hathaway’s businesses.

Indeed, Buffett himself makes a point to appear on the floor and hype up those companies, from eating Dairy Queen ice cream to putting his face and name on limited-edition event merch, all while his security keeps back hordes of shareholding fans trying to take pictures or get a word in with the so-called Oracle of Omaha.

His investing strategy has turned on an incessant search for value, with Berkshire Hathaway often sitting on giant piles of cash until just the right deal comes through. Few other CEOs have earned that level of patience from investors in a market that more often turns on expectations for short-term returns.

Buffett expects the company to move on from him. But so much of Berkshire’s identity has become intertwined with its CEO. It’s hard to imagine the low-profile Greg Abel, for example, putting his face on a ketchup bottle to spur sales. Woodstock for capitalists might get just a little less festive from now on.

two-day plunges

After "Liberation Day" (April 2), in which President Donald Trump unveiled tariff rates far higher than virtually all investors suspected, the S&P 500 (SNPINDEX: ^GSPC) experienced a whopping 10.5% plunge.

That's the fourth-worst two-day plunge in the past 75 years. Not only that, the April downdraft came after the market had already been on a downward trajectory since mid-February.

The good news for investors? History suggests that this is likely a great time for long-term-oriented investors to buy.

According to Stansberry Research, the April 3-4 tumble is the fourth-worst two-day stretch in the market since 1950. Looking at the other top 10 two-day plunges, all occurred at the outset of genuine crises -- the 1987 "Black Monday" plunge, the Great Financial Crisis of 2008, and the outbreak of COVID-19 in 2020:

As you can see, following these two-day plunges, stocks exhibited mixed performance one, three, and even six months later, with positive average returns but also with a very wide skew. In fact, even after the two-day plunge that ended on Oct. 7, 2008, the market was 17.2% lower six months later.

However, when one looks out a year beyond these 10 other instances, the average return is a whopping 27.2%, with every single instance in the green and the biggest one-year recovery at 59.2%. Look two years out, and the average return is 40.4%, with gains as high as 69.5%.

Warren Buffett is famous for the quip, "Be fearful when others are greedy and be greedy when others are fearful." Certainly, if the history of nauseating two-day drops is any guide, Buffett has historically been right on all counts.

But it's not just Buffett who has long touted the virtues of buying when others are selling and selling when everyone wants to buy. Buffett peer and Oaktree Capital founder Howard Marks, also a storied value investor, summed up the case nicely in his recent investment memo titled Nobody Knows (Yet Again).

In that memo, Marks notes how Oaktree went ahead and bought into both the 2008 financial crisis and the COVID-19 crisis, despite being highly uncertain about the future, unsure whether there would be further downside, and having no idea how or when the crises would end. All he knew was that financial assets were now heavily discounted.

The reason Marks takes a price-and-valuation-based approach and not one based on trying to game out future events is that:

We can't confidently predict the end of the world; we'd have no idea what to do if we knew the world would end; the things we'd do to gird for the end of the world would be disastrous if it didn't end; and most of the time the world doesn't end.

Buffett and Marks are, of course, not the first to espouse contrarian investing. After all, the phrase "Buy when there is blood in the streets" is attributed to 18th-century British nobleman Baron Rothschild, who coined the term after he bought into the panic following the Battle of Waterloo, which ultimately yielded him a fortune.

But there's also a case against buying today

Certainly, a lot of history suggests that buying into this market, while perhaps risky in the near term, is nearly certain to pay off in the long term. However, there are a couple of counter-narratives investors should be aware of that could make this time different.

First, the market is more expensive today than it was after those prior crashes. After the 1987 crash and the 2008 crash, the S&P 500 price-to-earnings (P/E) ratio was in the low- to mid-teens. In March 2020, the valuation was higher, in the low 20s. Today, the S&P 500 is around 26.9 times earnings.

While it's true that the average valuation of the market has been pushed up by the rise of the highly valued and heavily weighted "Magnificent Seven" stocks in recent years, the higher valuation on a historical basis means investors might not enjoy such historically robust post-drop returns from here.

Second, the implementation of tariffs, unlike these other instances, risks pushing up inflation, which may tie the hands of the Federal Reserve. Remember, the Fed responded to Black Monday, the 2008 Financial Crisis, and the COVID crisis by lowering interest rates. The Fed even went so far as to cut the Federal Funds rate to zero in 2008 and 2020 while also purchasing longer-term U.S. Treasuries, which kept rates low to stimulate the economy.

In recent days, various Fed officials have stated publicly that since tariff policies could drive up inflation, the Federal Reserve may be more limited in its ability to provide monetary stimulus this time. And whereas the Federal government in 2008 and 2020 was doing everything it could to help the situation, today the problem has actually been caused by the government, at least the Executive branch, which is still in the beginning of its four-year term.

But don't be paralyzed; stick with your plans

So, for all these reasons, it's quite possible that the market could experience further downside from here. On the other hand, the current administration also has more ability to rectify the situation than the administrations during those other market downturns, since it's also the entity that ignited this particular market crash in the first place.

All in all, if you do have investable dollars and engage in regular stock buys or 401(k) or IRA contributions, there's no reason not to invest today as long as it's within your financial plan and risk tolerance. As history has shown, times of great uncertainty are often the very best times to purchase stocks.

That said, the differences between the current crisis and 1987, 2008, and 2020 keep this investor somewhat cautious. Therefore, investors may want to think twice before committing heavily to stock-buying and/or using leverage to do so.

Investing is hard

Have you ever noticed the contradictions in our “wisest” investment slogans?

Is it…

“Let your winners run” or “Little pigs get big, but big pigs get slaughtered”?

“Cut your losers short” or “Time in the market beats timing the market”?

“Be greedy when others are fearful” or “Never catch a falling knife”?

“Stick to your investment plan” or “When the facts change, I change my mind”?

There will always be an investment maxim that, in hindsight, will have been the “wise” path you should have taken (usually quoted to you by a 23-year-old, wet-behind-the-ears recent hire at a brokerage firm).

You know that stock you sold when it fell 20%, triggering your stop-loss?

When it reverses and turns into a 300% winner, you should have known that…

“The stock market is designed to transfer money from the active to the patient,” as Warren Buffett once said.

But when you hold onto that other 20% loser in your portfolio – only for it to collapse 85% and never recover – you should have known that…

“Selling your winners and holding your losers is like cutting the flowers and watering the weeds,” as Warren Buffett once wrote.

(Technically, this comes from Peter Lynch, but Buffett liked the quote so much that he included it in one of his year-end reports to shareholders.)

Bottom line: Investing is hard.

[email from InvestorPlace Digest]

more from the same article...

About a decade ago, the research shop Longboard studied the total lifetime returns for individual U.S. stocks from 1983 through 2006.

They found that the worst-performing 6,000 stocks – which represented 75% of the stock-universe in the study – collectively had a total return of… 0%.

The best-performing 2,000 stocks – the remaining 25% – accounted for all the gains.

Here’s Longboard on the takeaway:

The conclusion is that if an investor was somehow unlucky enough to miss the 25% most profitable stocks and instead invested in the other 75% his/her total gain from 1983 to 2006 would have been 0%.

In other words, a minority of stocks are responsible for the majority of the market’s gains.

[then they go into their salespitch of course]

are you wealthy?

15 signs that you're actually wealthy

1. You save money

With 61% of Americans living paycheck to paycheck, the ability to save a few bucks each week puts you ahead of most people.

2. You invest

Your money can work harder for you than you ever can for it. By investing, you're putting those dollars to work, gathering interest and appreciation. 

Deciding to start investing in stocks and bonds is how many millionaires achieve their wealth, though some invest in a business (their own or those of others) to generate income as well.

3. You live comfortably below your means

Ironically, contentment with your income and the ability to live within it is another sign of being well off. This liberates you from the constant need to earn and spend more. 

By spending less than you earn, you'll ensure your wealth is long-lasting and won't be threatened by the next economic downturn.

4.  You can buy the things you want, even if you have to save

The one-percenters have an easy time forking out for a boat or a vacation to Paris, no question about it. But if you can afford the same luxuries after a few years of mindful spending and careful saving, you're still enjoying the same level of luxury, if not as often.

5.  You can afford to retire on time

Sadly, one in five Americans believe they'll never be able to retire. If you're on track to retire in your 60s (or retire early), you're one of the lucky ones. The ability to stop working and enjoy your golden years is truly enviable.

[and more]

Here we go again (?)

Stocks have been on fire this year.

YTD, the S&P 500 is up 26.9%.

What's interesting is that the S&P is on pace to close up 20% or higher for the second year in a row. (2023 was up 24.2%.)

That's a feat rarely seen in the past.

I have seen others state the same. But they do so as a cautionary tale and tie it to the dot-com bubble.

That's all well and fine.

But I see it a bit differently.

The dot-com bubble 'burst' in 2000 when the S&P dropped by -10.1% for the year. (That was also Y2K, which caused plenty of panic leading up to it, but came and went pretty much without a hiccup.)

The point is, the dot-com bubble was preceded by the dot-com (technology) boom.

In 1995 the S&P was up 34.1%.

In 1996 it was up 20.3%.

That was the first time it was up 20% or more for two years in a row since 1954-55.

So, what happened in 1997? It was up another 31.0%.

1998? Up another 26.7%.

And in 1999, it was up 19.5%.

A spectacular rally that lasted 5 long, glorious years.

Yes, the dot-com bubble arrived in 2000. But not before people got rich over the preceding 5 years with a 220% increase in the index, while plenty of individual stocks were up several hundred percent to several thousand percent.

And I'm here to say that I believe we could possibly see the same thing again now. Maybe 5 years or more of boom times – for similar reasons, and some unique to the present day.

***

Possibly.

-- Kevin Matras, Weekend Wisdom, 12/13/24

Art Cashin

Art Cashin, UBS’ director of floor operations at the New York Stock Exchange and a man The Washington Post called “Wall Street’s version of Walter Cronkite,” has died. He was 83 and had been a regular on CNBC for more than 25 years.

In the intensely competitive and often vicious world of stock market commentary, Cashin was that rarest of creatures: a man respected by all, bulls and bears, liberals and conservatives alike. He seemed to have almost no enemies.

He was a great drinker and raconteur, a teller of stories.

For decades, he assembled a group of like-minded friends every day after trading halted, first at the bar at the NYSE luncheon club, then across the street at Bobby Van’s Steakhouse, where the group came to be known as the “Friends of Fermentation.” His drink was Dewar’s, always on the rocks.

Cashin’s success was attributable to a combination of charm, wit, intelligence, and a stubborn insistence on refusing to adopt many of the conveniences of the modern world. He was a link to an NYSE tradition. Every year, on Christmas Eve and New Year’s Eve, he led the singing of the 1905 song “Wait ’Till the Sun Shines, Nellie.”

Cashin refused to use credit cards and paid for everything, particularly his voluminous bar bills, with cash, saying he cherished his anonymity. He never learned to use a computer — his notes were hand-written and then sent to his assistant. For years, he used an obsolete flip phone that he rarely answered.

His desk was piled high with papers he had accumulated over the decades. At times, it resembled a recycling facility.

Cashin’s suits were usually rumpled and his ties were always obsolete.

However, neither his appearance nor his attitude was haphazard. They were part of a persona that was carefully constructed over more than 50 years on Wall Street.

Arthur D. Cashin Jr. was born in Jersey City, New Jersey, in 1941. His parents were superintendents of an apartment building. His business career began in 1959 at Thomson McKinnon, a brokerage firm, when he was 17 and still in high school. Cashin had been obliged to join the workforce when his father died unexpectedly that year.

In 1964, at age 23, he became a member of the NYSE and a partner of P.R. Herzig & Co.

At that time, the vast majority of all trading took place on the NYSE floor. Cashin’s early memories revolve around the noise of thousands of brokers shouting at each other. He claimed to be able to tell if the market was moving up or down by the pitch of the screaming, because sellers sounded panicky. “And so if the pitch of the noise was high, I would know the sellers were headed my way. Or if it was a rumble, I would know that it was probably buyers coming,” he said in a 2018 interview.

In the mid-1970s, disgusted by the corruption in his hometown of Jersey City, Cashin ran for mayor. “I think I ran 12th in a field of five,” he said. “But once they discovered I was honest, there wasn’t much chance I was going to get elected.”

He returned to Wall Street. In 1980, he joined PaineWebber and managed its floor operation, continuing to do so after PaineWebber was bought by UBS in 2000.

Then came 2001.

Cashin would often recall what it was like to escape from Ground Zero on Sept. 11, 2001, after terrorists crashed two jetliners into the World Trade Center towers, killing more than 2,600 people in the heart of the nation’s financial center.

“Many of us got out that Tuesday walking through streets onto which ash, smoke and business envelopes fell snow-like, blocking both your view and your breathing,” he wrote in a commentary 13 days later. “Yet when a stranger was met, they were invited to join the convoy and offered a spare wet cloth (carried in pockets) through which to breathe as they walked. When we reached the East River (Brooklyn side of Manhattan), there was a volunteer group of tugboats, fishing boats and mini-ferries that looked like the evacuation of Dunkirk. No charge. No money. Just — “May I help you!” No one got anyone’s name. No thank you cards will be sent. But Americans — even New York Americans — who freely give to strangers but argue with neighbors were suddenly one group. In the days since, as we wander via new strange ways back to Wall Street, we all internalize the survivor’s quandary. We are lucky to be alive — but why us.”

After the Sept. 11 attacks, Cashin chaired the NYSE “Fallen Heroes Fund,” which provided millions of dollars to the families of first responders killed in the line of duty.

Though he was a respected market historian, he was most renowned as a storyteller for the stock market. He was a meticulous observer of fundamental and technical trading patterns but never let data get in the way of explaining the market in a folksy manner that made it accessible to even casual observers. He often spoke of Wall Street as a community of people with many different opinions. In his world, the bulls and bears would fight it out every day, as if it were all a John Wayne Western: “The bulls are circling the wagons, trying to defend the highs” was a common refrain.

His daily market commentary, Cashin’s Comments, was distributed to clients continuously for more than 40 years and was widely read on Wall Street. It invariably began with an analysis of an important event that occurred on that date (“On this date in 1918, the worldwide flu epidemic went into high gear in the U.S.”), and after a brief history lesson tied that event to the day’s market events (“Pre-opening Wednesday morning, U.S. stock futures looked like they might be coming down with the flu. Several earnings reports were less than glowing and some of the outlooks were cloudy”).

He was a keen observer of human behavior, a behavioral psychologist long before the word was coined. He had seen his fellow humans panic time after time, and had seen the effects of succumbing to the initial desire to sell immediately without thinking. “It tells me that people have a tendency to overreact — and to not think things through carefully,” he said. “And you break up, again, into two sets of people, those who look with some suspicion at events, and others who say, ‘Oh, I’ve got to react to that.’ Those who react immediately rarely do well. Those who are somewhat suspect, they do much better.”

He had two great loves in his life: his family and the New York Stock Exchange. In the age of computerized trading, the fabled NYSE trading floor still survives, though in greatly diminished form. When it was closed during the Covid pandemic, he said he was “disappointed ... but it was understandable.”

Cashin was philosophical when asked about the rise of electronic trading, which has slowly but surely eroded the influence of that floor. “I miss those magnificent days when your spirit hung on the fact that you were good for your word or you’re outta here,” he once said at Bobby Van’s, but admitted that electronic trading had improved the speed and accuracy of trading, particularly recordkeeping.

Among his many friends, he will perhaps be best remembered for his modesty. He seemed genuinely puzzled about his popularity. “People have an interest in — in Arthur Cashin. I can’t fully understand why,” he said.

And when The Washington Post ran a long profile of his career in 2019, calling him Wall Street’s version of CBS newsman Cronkite, he quipped: “I think I owe an apology to Walter Cronkite.”

In lieu of flowers, the family kindly requests donations be made to the Arthur D. Cashin Jr. Memorial Scholarship at Xavier High School. Contributions may be sent to Xavier High School, 30 West 16th Street, New York, NY 10011.

— CNBC’s Martin Steinberg contributed to this report.

Signs that you're wealthy

It’s easy to feel like you’re behind when your social media feeds are filled with friends taking lavish vacations and buying new cars. But your financial fitness may be better than you realize — even if your wallet isn’t bulging.

Contrary to how it may seem on the surface, being wealthy isn’t always signified by the stuff you have, the size of your home, or the label on your jeans. True financial freedom is harder to spot.

Once you stop focusing on traditional markers of wealth, you begin to see how rich you really are. Here are a few signs that you’re well-off that you’re probably overlooking.

1.  You save money

With 61% of Americans living paycheck to paycheck, the ability to save a few bucks each week puts you ahead of most people. 

If you consistently keep more cash in your wallet with every paycheck, you’re increasing the distance between you and disaster, and you're well on your way to financial security.

2.  You invest

Your money can work harder for you than you ever can for it. By investing, you’re putting those dollars to work, gathering interest and appreciation. 

Deciding to start investing in stocks and bonds is how many millionaires achieve their wealth, though some invest in a business (their own or those of others) to generate income as well.

3.  You live comfortably below your means

Ironically, contentment with your income and the ability to live within it is another sign of being well off. This liberates you from the constant need to earn and spend more. 

By spending less than you earn, you’ll ensure your wealth is long-lasting and won’t be threatened by the next economic downturn.

4.  You can buy the things you want, even if you have to save

The one-percenters have an easy time forking out for a boat or a vacation to Paris, no question about it. But if you can afford the same luxuries after a few years of mindful spending and careful saving, you’re still enjoying the same level of luxury, if not as often.

5.  You can afford to retire on time

Sadly, one in five Americans believe they’ll never be able to retire. If you’re on track to retire in your 60s (or retire early), you’re one of the lucky ones. The ability to stop working and enjoy your golden years is truly enviable.

6.  You can consider other things besides money in decision-making

Those with means can consider convenience, sustainability, style, and other factors when making purchases, not just the price. 

It’s odd, but when it’s not all about the money, that’s when you’re in the money. If money isn’t the only driver behind your decisions, you likely have plenty of it.

7.  You spend on things that give you back time

Whether it’s a housecleaner, a landscaper to mow your yard, or even a dishwasher, the fact that you can invest in products and services that aren’t necessities but save you time makes you an affluent person.

Unlike money, no person alive can ever get more than 24 hours in a day. Rich people know that time is a more precious resource than money, and they spend both accordingly.

8.  You’re not being pulled down by debt

Americans paid nearly $164 billion in credit card interest and fees in 2022. 

If you’ve managed to pay off any debts you’ve had, you’re at least richer than the average person. That excludes student loans, car notes, and other debt. Wealthy folks know the value of collecting interest, not paying it.

9.  You invest in yourself

Your library of knowledge is one of the most productive investments you can make, though it doesn’t come cheap. You're certainly well off if you can afford the money and time for good books, courses, seminars, and other learning materials.

10.  Your net worth is increasing

Where you’re going is arguably more important than where you’ve been. If your net worth — the difference between the value of the assets you own and the liabilities you owe — is positive and growing, you’re on the right path.

11.  You’re able to look past the price

If you can buy things with quality and price of ownership in mind (rather than getting the cheapest item that fits the bill because it’s all you can afford), that’s a sign you’re financially well off.

It’s sad and ironic that those with more money tend to get better bargains because they can make larger one-time purchases to get bulk deals or buy quality products that last.

12.  You have peace of mind

Knowing you and your loved ones are covered with life, health, home, and auto insurance in case disaster strikes allows you to sleep better at night. 

Insurance can protect you from a black swan event, wiping out the wealth you’ve worked hard to build.

13.  You have a strong network

Another non-monetary indicator of wealth is in the people around you. If you have a strong network of friends and family to check in on you and help you during hard times, then you are wealthy.

14.  You share time and money with others

Perhaps the most significant sign of wealth is the ability to give it away. Giving money to a church, charity, non-profit, or other worthy cause brings meaning and purpose behind having it in the first place. And since time is money, volunteering your time counts, too.

15.  You partake in activities that have meaning to you

One of life’s most lavish luxuries is spending time on things that bring you joy. 

Whether you step up your travel game, enjoy woodworking, write music, or help at a soup kitchen, having the time and money to pursue things other than money is a subtle sign of affluence.

Bottom line

Saving, investing, giving a little money to charity, and enjoying a few of life’s pleasures are all signs of financial fitness.

Those things aren’t easily detectable via labels and Instagram photos, but they are some of the best things money can buy.

interest rate cuts and the stock market

We all know that the Fed has reached the end of its hiking cycle and now has interest rate cuts in sight. From a historical perspective, the start of the easing process has been bullish. Going all the way back to 1921 and spanning 24 periods, the DJIA advanced an average of 15% a year following the first cut.

The narrative surrounding interest rate cuts becomes even better when we factor in whether or not the economy was in a recession. When the Fed has avoided recession, stocks have ripped higher, up 24% on average a year later.

In addition, the Fed has made it clear that it plans to cut rates slowly. The S&P 500 widely outperforms in the 1st year of slow easing cycles versus fast ones. Why is that the case? Because in fast easing cycles, it usually means something has gone wrong (such as the start of easing cycles in 2001 and 2007). But in this case, with the economy on sound footing, a slow easing cycle should bode well for stock returns.

Regardless of what you've heard in the financial media, interest rate cuts don't have to doom stocks, particularly when there is no recession and a slow easing cycle.

Election And Seasonal Cycle Stats Point to More Strength Ahead

We're in the 4th year of President Biden's term. Another reason to be bullish is the fact that election years tend to see enhanced gains when we have a new President that's still in his first term. Dating back to 1950, the S&P 500 gains an average of 12.2% under new Presidents, far above the typical election year return of 7.3%.

-- Weekend Wisdom, 3/23/24

Presidential Election Cycle

The stock market has historically performed better in the third year of a presidential cycle. The theory behind this is that politics and its effect on economic policies can cause the stock market to perform better. Investors expect better business conditions, corporate bottom lines and stock prices in the year before a presidential election.

On this page, we study the effect of the presidential cycle and political parties and their effects on stock market performances. The data is from 1928 to 2023, and updated daily.

As shown in the table below, the market indeed performs the best during the third presidential year of a four-year term. The average gain of the third presidential year is 13.96%. The second best year is the fourth presidential year, with an average gain of 7.38% . The worst year is the second presidential year, with an average gain of just 3.33%. On average, the market has gained 7.82% a year since 1928.

Average annual gains in different presidential years and political parties (%) since 1928

         Democrat Republican    Average

Year 1  12.89%   -0.76%    6.63%

Year 2   3.70%    2.89%    3.33%

Year 3  15.42%   12.23%   13.96%

Year 4   9.39%    5.21%    7.38%

Average  10.35%    4.90%    7.82%

The table also shows a much higher average gain when a Democrat is in the White House. On average, a Democratic president sees an average annual return of 10.35%, while a Republican president just sees an average gain of 4.90%. The third year of a Democratic president would see the highest gains, with the annual average of 15.42%. Among the different combinations of political parties and presidential years, the third years with Democratic presidents see the best returns, followed by the third years with a Republican president. The worst years are the first years with a Republican president.

Out of the last 97 years, there were 65 positive years, or 67%. These are the percentages of the years that have seen positive returns. Again the third years stand out with more positive returns. A first year with a Republican president did the worst.

The Seven Virtues of Great Investors

I started reading Morgan Housel's Psychology of Money because it was recommended by my Kindle.  I can give no higher recommendation than that I am continuing to read it.  I borrowed it on Libby, but it's one of those books that I would actually buy!

Anyway, on the cover is a blurb by Jason Zweig, "one of the best and most original finance books in years".

Zweig is a columnist for the Wall Street Journal and I googled him.  Turns out he has a blog and one of the blog entries is The Seven Virtues of Great Investors.  I'm reading it and it sounds OK to me (but it's not as interesting as Housel's book).

All Hail Munger

Warren Buffett’s great friend and business partner Charlie Munger recently died a little short of his 100th birthday. Buffett has said that Munger made him a better investor — via advice such as: “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.” Here are more nuggets credited to Munger:

• On investing: “The world is full of foolish gamblers, and they will not do as well as the patient investor.” And: “Warren and I don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time.”

• On risk: “When any guy offers you a chance to earn lots of money without risk, don’t listen to the rest of his sentence. Follow this, and you’ll save yourself a lot of misery.”

• On succeeding in life: “It’s so simple. You spend less than you earn. Invest shrewdly, and avoid toxic people and toxic activities, and try and keep learning all your life. … And do a lot of deferred gratification because you prefer life that way. And if you do all those things you are almost certain to succeed. And if you don’t, you’re gonna need a lot of luck.”

• On learning: “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero. You’d be amazed at how much Warren reads — and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”

• On thinking: “We all are learning, modifying or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.”

Search for “Charlie Munger” online, and you’ll find much more Munger wisdom that might make you a better investor — or person.

-- Star Advertiser, 1/1/24

Charlie Munger

NEW YORK, Nov 28 (Reuters) - Charles Munger, who died on Tuesday, went from working for Warren Buffett's grandfather for 20 cents an hour during the Great Depression to spending more than four decades as Buffett's second-in-command and foil atop Berkshire Hathaway Inc.

Munger's family had advised that he died peacefully on Tuesday morning at a California hospital, said Berkshire.

The union of Munger with Buffett is among the most successful in the history of business; they transformed Omaha, Nebraska-based Berkshire into a multi-billion dollar conglomerate with dozens of business units.

Yet the partnership that formally began when they teamed up in 1975 at Berkshire, where Buffett was chairman and Munger became vice chairman in 1978, thrived despite pronounced differences in style, and even investing.

Known almost universally as Charlie, Munger displayed a blunter form of musings, often in laconic one-liners, on investing, the economy, and the foibles of human nature.

He likened bankers to uncontrollable "heroin addicts," called the virtual currency Bitcoin "rat poison," and told CNBC that "gold is a great thing to sew into your garments if you're a Jewish family in Vienna in 1939 but I think civilized people don't buy gold. They invest in productive businesses."

Munger was no less pithy in talking about Berkshire, which made both he and Buffett billionaires and many early shareholders rich as well.

"I think part of the popularity of Berkshire Hathaway is that we look like people who have found a trick," Munger said in 2010. "It's not brilliance. It's just avoiding stupidity."

EXPANDING BUFFETT'S HORIZONS

Munger and Buffett did differ politically, with Munger being a Republican and Buffett a Democrat.

They also differed in personal interests.

For example Munger had a passion for architecture, designing buildings such as a huge proposed residence for the University of California, Santa Barbara known as "Dormzilla," while Buffett claimed not to know the color of his bedroom wallpaper.

Yet at Berkshire, the men became inseparable, finishing each other's ideas and according to Buffett never having an argument.

Indeed, when Munger and Buffett would field shareholder questions for five hours at Berkshire's annual meetings, Munger routinely deadpanned after Buffett finished an answer: "I have nothing to add."

More often, he did, prompting applause, laughter or both.

"I'm slightly less optimistic than Warren is," Munger said at the 2023 annual meeting, prompting laughter after Buffett expressed his familiar optimism for America's future. "I think the best road ahead to human happiness is to expect less."

Like Buffett, Munger was a fan of the famed economist Benjamin Graham.

Yet Buffett has credited Munger with pushing him to focus at Berkshire on buying wonderful companies at fair prices, rather than fair companies at wonderful prices.

"Charlie shoved me in the direction of not just buying bargains, as Ben Graham had taught me," Buffett has said. "It was the power of Charlie's mind. He expanded my horizons."

ORACLE OF PASADENA

Fans dubbed Buffett the "Oracle of Omaha," but Munger was held in equal esteem by his own followers, who branded him the "Oracle of Pasadena" after his adopted hometown in California.

Munger reserved many of his public comments for annual meetings of Berkshire; his investment vehicle Wesco Financial Corp, which Berkshire bought out in 2011; and Daily Journal Corp, a publishing company he chaired for 45 years.

To fans, Munger was as much the world-weary psychiatrist as a famed investor. Many of his observations were collected in a book, "Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger," with a foreword by Buffett.

"I was raised by people who thought it was a moral duty to be as rational as you could possibly make yourself," Munger told Daily Journal shareholders in 2020.

"That notion," he added, "has served me enormously well."

In 2009, during the worst U.S. recession since the Great Depression, he tried to put his followers at ease.

"If you wait until the economy is working properly to buy stocks, it's almost certainly too late," he said at Wesco's annual meeting.

After that gathering, Los Angeles Times columnist and Wesco investor Kathy Kristof wrote about Munger: "He gives us hope."

TETE-A-TETE

Born on Jan. 1, 1924, Munger as a boy once worked part-time at the Omaha grocery run by Buffett's grandfather Ernest.

Buffett also worked there though he and Munger, who was 6-1/2 years older, did not work together.

Munger later enrolled at the University of Michigan, but dropped out to work as a meteorologist in the U.S. Army Air Corps during World War II.

Despite never getting an undergraduate degree, Munger graduated from Harvard Law School in 1948.

He then practiced law in Los Angeles, co-founding the law firm now known as Munger, Tolles & Olson, before turning in the mid-1960s to managing investments in stocks and real estate.

Munger was a success, easily outperforming the broader market between 1962 and 1975 at his investment partnership Wheeler, Munger & Co.

According to Buffett biographer Alice Schroeder, Munger met Buffett in Omaha in 1959, where at a private room at the Omaha Club they "fell into a tete-a-tete" after being introduced.

More conversations followed, and they were soon talking by phone for hours on end.

"Why are you paying so much attention to him?" Munger's second wife Nancy reportedly asked her husband.

"You don't understand," Munger replied. "That is no ordinary human being."

KNOWING HIS MILIEU

The two shared the "value investing" philosophy espoused by Graham, looking for well-run companies with undervalued share prices.

Sometimes Munger and Buffett deemed those companies "cigar butts," meaning they were out of favor but had a few "puffs" of life left, but they often proved worth holding onto for decades.

Both generally shunned technology companies and other businesses they claimed not to understand, and they avoided getting burned after the late 1990s dot-com bubble went bust.

Instead, they oversaw purchases such as the BNSF railroad in 2010, and ketchup maker H.J. Heinz Co, which Berkshire and private equity firm 3G Capital bought in 2013. Berkshire and 3G later merged Heinz with Kraft Foods.

It was Munger who suggested that Buffett make one of Berkshire's few non-U.S. investments, in Chinese automobile and battery company BYD Co.

Munger was also responsible for introducing Buffett to Todd Combs, who along with Ted Weschler run parts of Berkshire's investment portfolio.

Unlike Buffett, who opened a Twitter account - seldom used - Munger resisted heading into social media.

"That's not my milieu. I don't like too many things going on at once," he once told Reuters.

But in many other ways, he was much like his business partner, especially in not chasing the latest trends.

"I am personally skeptical of some of the hype that has gone into artificial intelligence," Munger said at the 2023 annual meeting. "I think old-fashioned intelligence works pretty well."

Munger lived modestly and drove his own car, though he used a wheelchair in his final years.

He was also a generous philanthropist, pledging more than $100 million in 2013 to build housing at the University of Michigan.

Nancy Munger died in 2010. Charlie Munger had six children and two stepchildren from his marriages.

***

Yahoo Finance

Becky Quick looks back

Final CNBC interview

CNBC looking back

Whitney Tilson

Bob Farrell's 10 Rules

Who is Bob Farrell?

Twelve years after the conclusion of the Second World War, Bob Farrell started his career at Merrill Lynch as a technical analyst. Before kickstarting his illustrious career at Merrill Lynch, Farrell studied at the prestigious Columbia business school under Benjamin Graham and David Dodd. Graham and Dodd are widely hailed as the “godfathers of modern value investing” and are best known for their best-selling book “Security Analysis,” which was first published in 1934. In fact, Graham and Dodd are so synonymous with value investing that Warren Buffett (also a student of Graham at Columbia) attributes much of his success to the classic work and teachings of the two value investing legends.

A Wall Street Pioneer

While Mr. Farrell was educated under the value investing umbrella, he found his niche and success on Wall Street at the intersection of technical analysis, sentiment, and market psychology. Though this type of analysis was considered unconventional and even frowned upon at the onset of his career, by the end of Farrell’s nearly five-decade run on Wall Street, it had become mainstream. Farrell became so respected in market circles that his daily newsletter was read by several of the world’s sharpest money managers, including the likes of multi-billionaire George Soros. There is little Mr. Farrell hasn’t seen or experienced throughout his career. Below are Farrell’s 10 Rules:

1.   Markets tend to revert to the mean over time. Like a rubber band stretched in one direction, markets tend to snap back to the other direction eventually.

2.   Excesses in one direction will lead to an opposite excess in the other direction. Think about the internet boom and bust. At one point, stocks like Pets.com would rocket 200% in a single trading session just because they had “.com” in the name. During 2000-2003, the market unraveled just as violently in the opposite direction. The COVID-19 crash and subsequent rally afterward is another prime example:

3.   There are no new eras – excesses are never permanent. History is littered with boom-and-bust periods – nothing lasts forever. The great “Tulip Mania” of the 17th century, the dot com bust of 2000, and the 2008 housing debacle personify this rule.

4.   Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. The meme craze that occurred a few years ago is a good illustration of this rule. In 2020, GameStop (GME - Free Report) ran from $1 to $5.50 in five months. After more than a 500% move in such a short time, that wasn’t the end. The following month, shares soared 1600% to $120 a share before correcting to their current price of $18 per share.

5.   The public buys the most at the top and the least at the bottom. Most investors let their emotions get the best of them. Generally, if the public invested when they were most fearful and sold when they were most giddy, they would be much more profitable. In late 2022, most sentiment gauges showed fear. Over the next few months, the market went on a tear.

6.   Fear and greed are stronger than long-term resolve. The fast-moving pace of Wall Street can wreak havoc on investor emotions. When the opening bell rings and real money is on the line, it is akin to having a volume dial on emotions for most investors. The lack of discipline to create and stick to a well thought out investing plan can be detrimental to investors. Even if a well-thought-out plan is created, execution always supersedes intentions.

7.   Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names. A “blue chip” is a well-established mega-cap company such as Apple (AAPL - Free Report) . Breadth refers to the number of stocks participating in a rally. The participation gauge is an important measure to follow because it can provide clues to a market breakdown prior to it occurring. In early 2021, Apple and other mega-cap blue chip stocks continued higher as the market began to stall slightly – a subtle, early caution flag for savvy investors who were paying attention.

8.   Bear markets have three stages – sharp down, reflexive rebound, and a drawn-out fundamental downtrend. Because the public typically buys the dip at the wrong time or shorts “in the hole” when stocks have already moved down rapidly, equity markets usually have a violent “bear market rally” before trending lower.

9.   When all the experts and forecasts agree – something else is going to happen. Contrarian, independent thinking is the clearest path to success on Wall Street. Following the Global Financial Crisis, David Tepper bought Bank of America (BAC - Free Report) in 2009. Later when he recounted the trade, he said, “I felt like I was alone”. The trade ended up netting him $4 billion. To achieve outstanding results, you must think differently.

10.  Bull markets are more fun than bear markets! While making money in a down market can be done, bull markets are much more forgiving. Who can argue this?

Conclusion

Over Farrell’s 45-year career at Merrill Lynch, he saw bull markets, bear markets, and everything in between. While investors can educate themselves by reading books or attending seminars, nothing beats decades of seat time. Through his successful and deep experience, Farrell’s rules challenge investors to study history, the madness of crowds, and their inherent “humanness” and emotions.

Kevin Matras outlook

[12/23/22] Regardless of how this year ends, statistically, next year should be much better.

The 4-year Presidential Cycle shows that year 3 (that's 2023), is the best year of all 4 years. In fact, since 1950, stocks have always gone up in the year after midterms, with an average 12-month forward return of 18.6%.

[9/30/22] It’s been a rough year so far.

40-year high inflation, which forced the Fed to aggressively raise rates in an effort to bring it down, has been weighing on stocks.

As tough as this year has been, I’m reminded of the comparison that was made between the first half of this year, and the first half of 1970.

This year’s first half performance (the S&P was down nearly -21%), was strikingly similar to that of 1970 (also down -21%). And in both periods, high inflation was an issue.

But in the second half of 1970, the S&P was up 27%.

Of course, that doesn’t mean that’s how it’ll go for the back half of this year. But it doesn’t mean it won’t either.

Granted, the last few months haven’t been any easier. And there’s only 3 months left of this year. But with plenty of economic positives backstopping the economy right now, not the least of which is a strong labor market, there’s definitely a chance that the market is being too pessimistic.

While we unofficially saw a recession after Q2 GDP fell by -0.6%, which followed Q1’s -1.6% (two quarters in a row of negative GDP is the technical definition of a recession), consumer demand remained strong throughout. So did corporate earnings. And the jobs market stayed sizzling hot.

You can also see that in the GDI numbers (Gross Domestic Income), which measures U.S. economic activity via the income earned for these activities. Usually, the GDI and GDP (Gross Domestic Product) are statistically very similar. But unlike the GDP, the GDI was up in the first half of the year with a positive 0.5% annualized growth rate, while GDP was down.

Will these two measures converge? If so, will GDP rise to meet GDI, or will GDI fall to meet GDP? Or maybe a little bit of both? TBD. But, at the moment, GDP forecasts are pointing to plus signs for the rest of the year.

Q3 GDP is only expected to eke out a 0.3% gain. But Q4 is expected to be better, with full year estimates showing another year of growth. (It’s no longer a recession when the economy starts growing again.)

And the Fed is predicting 2023 to be even better still with a 1.8% GDP growth rate.

So there’s plenty of positives in the market right now. (The market happens to be ignoring them at the moment. But they are there nonetheless.)

And with the market seemingly pricing in the worst-case scenario (deep and long recession), stocks are primed to rally once it looks like the worst-case scenario won’t come to pass (shallower and shorter recession).

Peak Inflation Is Behind Us

One of the key factors which will likely determine where the market goes from here, will be inflation, and therefore, interest rates.

Even though inflation is still too high, it has been ticking down for the last few months.

Headline inflation, according to the Consumer Price Index (CPI), is at 8.3% y/y, with core inflation (less food & energy) at 6.3%. That’s down from its peak of 9.1% and 6.5%.

While that dip is not a lot, and it’s a far cry from the Fed’s goal of getting it back down to 2%, the mere fact that it’s no longer making new highs, and instead is ticking lower, is a step in the right direction.

(Oil prices, for example, have fallen sharply. After trading over $130 a barrel, crude oil is now trading at $82. That’s a decline of -37% in a matter of months. And that’s helping to ease inflation concerns.)

A few months ago, many were expecting inflation to soar above 10% or more. Now, expectations are for it falling to 5-6% next year, with the core rate falling even lower.

And that means the Fed may not have to raise rates as much as people are fearing.

Are Stocks Undervalued?

Let’s also not forget that valuations are down.

The P/E ratio for the S&P is at multiyear lows, and is trading below its five-year average.

And that makes stocks a bargain.

Of course, if earnings drift lower, valuations will creep up. But there’s plenty of room for stocks to remain relatively cheap.

And the earnings outlook is still forecasting growth.

Add in another trillion dollars in stimulus between the CHIPS Act and the Inflation Reduction Act, and that should extend the growth outlook even further.

How Do Stocks Perform Around Midterms?

Many are familiar with the Presidential Cycle and the markets. But many may not know that the Presidential Cycle covers all for years of a presidency.

Of particular interest is the midterm portion of the cycle, which is where we are right now.

And historically, it’s amazing to see how favorable this cycle is for investors at this point in time.

Developed by Yale Hirsch, of the Stock Trader’s Almanac, the theory suggests that the stock market follows a pattern which correlates with a U.S. president’s four-year term. The election cycle consists of the post-election, midterm, pre-election, and election years. 2022 is an example of a midterm year, i.e., the second year in the 4-year presidential cycle.

In the first two years after an election, the second year tends to be the weakest. In fact, it’s the weakest of all four years. Congressional elections take place – and with them, they bring the potential to shift the political backdrop.

Hirsch discovered that wars, recessions, and bear markets (sound familiar?) tend to start in the first two years of a president’s term. This year, the market entered the weak spot of the cycle. And with an aggressive Fed, high inflation, and the ongoing Russia-Ukraine war, the weakness in stocks was amplified.

Those who know their market history will find it somewhat unsurprising that the start to this year was rough. The second and third quarters of midterm years are historically quite weak. (History repeating itself once again.)

But more prosperous times typically lie ahead in the latter half of the cycle.

In fact, we’re entering the most bullish part of the calendar – Q4 of year 2 in the 4-year presidential cycle (the second-strongest quarter of all 16 quarters), sporting an average return of 6.6% (since 1950); and Q1 of year 3 (the strongest quarter of all 16 quarters), with a 7.4% average gain.

And when we factor in that the third year of the presidential cycle has historically witnessed the best performance of all four years, the outlook for stocks looks even brighter.

-- Kevin Matras, Weekend Wisdom, 9/30/22

inflation is high

[12/13/22] Inflation up 0.1% from October to November (7.1% year-over-year)

[8/3/22] Gasoline prices drop for 50 straight days

[7/13/22] Inflation continued to surge as the consumer price index rose by 9.1% in June compared to last year. It was an increase of 1.3% from May. Economists expected inflation to increase by 1.1% from May to June and top out at 8.8% for the last 12 months. It is the fastest increase in inflation since 1981.

According to the latest data from the Bureau of Labor Statistics, the biggest driver of inflation was energy prices, which rose by 7.5% from May and have jumped by 41.6% over the past 12 months. While the cost of gasoline has been dropping since reaching record highs, it was still up by 11.2% from May to June.

The price of food was also higher, rising by an average of 1% last month. In addition, the cost of shelter was 0.6% higher, and the average cost of rent increased by 0.8%, the largest monthly increase since 1986.

[6/20/22] Clyburn blames inept Trump administration coronavirus response for inflation 

[6/10/22] Inflation rate highest in 40 years

[4/12/22] U.S. consumer price increases quickened in March, underscoring ongoing inflationary pressures as supply chain disruptions and shortages lingered across the economy.

The Bureau of Labor Statistics' (BLS) Consumer Price Index (CPI) rose 8.5% in March compared to the same month last year, according to the latest report released Tuesday. That marked the fastest rise since December 1981. This followed a 7.9% annual increase in February. Heading into the report, consensus economists were looking for an 8.4% jump for March, according to Bloomberg data. 

On a month-over-month basis, prices rose 1.2% in March following a 0.8% monthly rise in February. 

Some of the biggest contributors to the latest increase in inflation were food, shelter and gasoline, according to the BLS. In fact, the index tracking gas prices surged to rise 18.3% month-on-month in March, comprising more than half of the total monthly increase in CPI. In February, gasoline had posted a 6.6% monthly increase.

But even excluding more volatile food and energy prices, the CPI also posted a marked move higher in March. The core CPI jumped 6.5% in March over last year, accelerating from a 6.4% increase in February and representing the fastest increase since August 1982.

A number of other major categories also contributed to the March increase in CPI, however. Shelter prices rose 0.5% month-on-month in March and by 5.0% over last year, representing the biggest annual rise since May 1991. Airline fares also soared by 10.7% on a monthly basis and by nearly 24% over last year, as rising fuel costs and increased demand for travel pushed ticket prices still higher. 

Headline consumer price increases have accelerated on an annual basis for seven consecutive months now. Imbalances between supply and demand have persisted, especially in labor — with job openings still far outpacing new hires — and in commodities amid Russia's ongoing war in Ukraine. Many of these costs have been passed on continuously to the consumer.

With definitive signs of a peak yet to be seen in inflation, members of the Federal Reserve have escalated their rhetoric on using monetary policy tools to bring down fast-rising prices. Last week, Fed Governor Lael Brainard said that bringing down inflation was "our most important task," while San Francisco Fed President Mary Daly said that high inflation was "as harmful as not having a job."

Meanwhile, the Federal Reserve's March meeting minutes suggested that "many participants ... would have preferred a 50 basis point increase" in benchmark interest rates, with the larger-than-typical rate hike serving as an aggressive move toward raising borrowing costs and bringing down demand.

The Federal Reserve is set to convene for a policy-setting meeting May 3 and 4. 

the market and the midterms

If you have money in stocks during this bear market, you are probably having a rough year. The bond market has been miserable, too. There have been few bright spots for investors.

Yet there is one positive portent right now: the calendar.

With a surprising degree of consistency over the past 100 years or so, stocks have followed a broad pattern that coincides with presidential terms. The months leading up to midterm elections have generally been the worst in what is known as the four-year presidential election cycle. But the stock market is about to enter a sweet spot. Stocks have usually rallied in the year after the midterms — no matter which side wins.

Market veterans take these patterns seriously but aren’t counting on them in an economy plagued by soaring inflation, rising interest rates and fears of a recession.

“We’ve studied the presidential cycle carefully, and there’s something to it,” said Philip Orlando, the chief equity market strategist for Federated Hermes, a global asset manager based in Pittsburgh. “But it’s possible that this year we will need to invoke the four most dangerous words in investors’ lexicon: ‘This time is different.’”

Gloom in the markets

Consider, first, the overall pessimism in the markets.

In the current climate, this comment, from Mark Hackett, the chief of investment research at Nationwide, counts as fairly upbeat. “We are now entering a stage where all signs point to a recession — assuming we aren’t already in one,” Hackett said. But, he added, “the recession may already be priced into the markets, in which case the next bull run may be faster and come earlier than many investors expect,” he said.

The latest government figures show that the economy grew at a 2.6% annual rate in the third quarter. But the Federal Reserve says interest rates need to rise and stay high until the inflation numbers come down. The Fed’s monetary tightening is aimed at slowing the U.S. economy. Whether the consequences for working people will be mild or savage isn’t clear.

In the meantime, the coronavirus pandemic festers, the death toll from Russia’s war in Ukraine mounts, interest rates are rising elsewhere around the world, global energy costs remain elevated and U.S. relations with China are fracturing. All these concerns are weighing on the markets.

The presidential cycle

The party of a sitting president tends to lose seats in Congress in midterm elections, and high inflation makes matters worse for incumbents. Those are key findings of Ray Fair, a Yale economist whose long-running election model relies only on economic factors and shows the Democratic Party in an uphill climb this year.

His model, along with the polls, the prediction markets and many forecasters, suggests that Republicans are likely to win control of the House of Representatives. The Senate is up for grabs.

The issues in this election are enormous, and the vast differences between the two political parties are well chronicled.  Yet, for the stock market, history suggests that the outcome of the elections may not matter much. Shocking though this may be, since 1950, the midterm elections have brought an upturn for stocks, no matter which party has won, and no matter the issues.

The market has generally flagged in the months before the midterms and prospered after them. And it has often excelled in the year after the midterms, typically the best of the four-year presidential cycle.

Ned Davis Research, an independent investment research firm, compared stock returns for 1948 through 2021, broken down by the four years of a standard presidential term. It used the S&P 500 and a predecessor index:

12.9% for Year 1.

6.2% for Year 2, the year of the midterms.

16.7% for Year 3, the year after the midterms.

7.3% for Year 4.

[But why?  There is no certain answer.  The explanation I prefer is that presidents try to stimulate the economy - and, indirectly, bolster stocks - for maximum effect in presidential elections.

Their first year in office is the best time to make politically painful moves, which often lead to weak markets by the time the midterms come around.  After losses in the midterms, though, presidents try to give the economy a surge through expansionary fiscal and monetary policy, settring themselves (or their successors) up well fo the election.

Is this an exception?

Two powerful factors — the negative effect of a slowing economy and the beneficial influence of the midterm elections — may be in conflict, Ed Clissold, the chief U.S. strategist of Ned Davis Research, said in an interview.

On the positive side for stocks, Wall Street usually responds well to gridlock — the stasis that can grip Washington when power is divided — and such a division is the consensus expectation for the midterms. But, over the last century, when bear markets have been associated with recessions, no bear market has ever ended before a recession started, Clissold has found. The last time there was a recession in the year following the midterms occurred after the 1930 elections, during the Great Depression, a terrible era for stocks and the economy.

“A recession would be expected to be more important than the election cycle,” he said.

Practical steps

There are many ways of making bets on specific election outcomes, though they entail risk that I don’t favor.

For example, if Democrats defy the odds and hold onto both houses of Congress, infrastructure spending will be expected to increase. Matthew J. Bartolini, the head of exchange-traded fund research at State Street Global Advisors, said, to bet that way, you might try SPDR S&P Kensho Intelligent Structures ETF. It includes “intelligent infrastructure” companies — like Badger Meter, which supplies utilities with water-metering equipment, and Stem, which provides software and engineering for green energy storage.

If you want to bet on gridlock, you may assume that a split government will be bullish for the overall market. Then again, the need to raise the federal debt ceiling in 2023 could become a market crisis. Republicans have vowed to use the issue as leverage, forcing President Joe Biden to cut federal spending. Similar maneuvering in 2011 led to the downgrading of U.S. Treasurys by Standard & Poor’s, sending tremors through global markets.

Tactical bets on election or economic outcomes are unreliable. That’s why what makes sense to me, regardless of the immediate future, is long-term investing in diversified stocks and bonds using low-cost index funds that track the entire market. This approach requires a steady hand, a horizon of at least a decade and enough money to safely pay the bills.

Short term, try to fortify your portfolio and build up your cash so you can handle any economic or electoral outcome.

-- Jeff Sommer, New York Times (Star-Advertiser, 11/6/22)

Jay Powell wants you to lose money

Seeking to quell inflation, the Federal Reserve has raised its benchmark interest rate from near zero to above 3% in record time. And at its most recent meeting, on Sept. 21, the central bank projected it would add an additional one and a half percentage points in the coming months—promptly sending markets into a nosedive.

We’ve officially entered a very different financial climate, where prudent investors may want to reassess where they put their money. The Fed’s principal policy lever is interest rates; when they go up, the value of future cash flows goes down—hurting assets from stocks and bonds to housing and many currencies. So when Fed Chair Jerome Powell tells you he wants to reduce inflation by raising rates (aka tightening), he’s telling you the central bank needs investors to lose money. The goal is for those losses to seep into the rest of the economy when capital investment and consumption decline, slowing growth, demand, and—ultimately—inflation.

To understand how we got here, you have to go back to the 2008 financial crisis, when the Fed was doing exactly the opposite. The central bank felt forced to take rates to zero to alleviate the distress indebted households and companies were feeling. Lower rates meant smaller interest payments for debtors seeking to repair their balance sheets. In 2008, household debt topped 97% of gross domestic product; today, it’s about 75%, the lowest in 20 years.

For savers, though, high-interest accounts that once yielded 5% interest suddenly paid 1%. The annual return on $50,000 in savings fell to $500 from $2,500, forcing people who relied on interest as a principal source of income to rethink their strategy. That usually meant turning to riskier assets, so money poured into stocks, pushing the S&P 500 index up sevenfold from its post-crisis nadir to its peak in January.

With the Fed funds rate near zero, ordinary savings accounts paid minimal interest, spurring some to quip that “cash is trash.” This mantra seeded the psychology that fueled crypto assets and meme stocks, even as it created a windfall for the economy, allowing companies from Amazon.com to General Motors to Marriott to boost capital investment. Sure, some of that was foolhardy. Australia’s BHP Billiton, for example, poured $20 billion into US shale oil projects early in the 2010s. That paid off when crude rose to more than $100 a barrel, but it looked less wise when oil fell below $30. By 2017, BHP was taking billions in writedowns on those investments as shale oil flooded the market.

By that time, the US economy was back on track. With unemployment sinking to 4.3%, cheap money had served its purpose, and the Fed slowly began raising rates. It soon found the economy was still too weak to handle them, so it reversed course in 2019. Then it had to try other stimulative measures in 2020 to reduce damage done by the coronavirus pandemic.

Now the economy can handle higher interest rates—and with inflation above 8% for the first time in four decades, the Fed desperately wants to apply them. In fact, it’s rushing to make up for lost time. As a result, investors are quickly discovering that cash is no longer trash—it’s an important asset class that provides a haven. Imagine if, next summer, your bank were to offer 5% interest on a three-year certificate of deposit. Would you take the sure thing?

Many Americans will, showing just how quickly the psychology of investing has changed. If the slowing economy lowers inflation to more acceptable levels, a host of investment opportunities will look better. Treasury yields and investment-grade bond yields are rising now. At some point soon, interest rates will top out, and the returns from those less risky options will look enticing.

This change in psychology won’t be limited to safe assets. Wall Street is in the midst of a bear market: The S&P 500 this year is down more than 20%, and the Nasdaq 100’s decline has topped 30%. Those returns won’t get much better with interest rates rising, the economy slowing, and corporate earnings taking a hit. So investors have already begun to withdraw money from stocks, with equity mutual funds registering 32 straight weeks of outflows, according to the Investment Company Institute.

They won’t come out and say it, but when members of the Fed’s Board of Governors see this reaction, they’re probably pleased. Capitulation makes their job easier. The quicker asset prices react to the tightening of conditions, the faster inflation will fall. But after the slowdown induced by higher interest rates, the selloff will end and inflation will decline. We’ll be in a new investing regime for the first time in more than a decade. Now is the time to prepare.

-- ByEdward Harrison, September 28, 2022

what the Volcker era teaches us now

When inflation soared 40 years ago, people with patience came out fine.

The cost of living is sky-high, and Jerome H. Powell, the chair of the Federal Reserve, says that battling it is his highest priority. He has raised interest rates to damp down inflation, which hit its highest point in 40 years. Financial markets don’t know quite how to react.

Something similar happened the last time inflation was out of control. Paul A. Volcker was the Fed chair then. He wrung inflation out of the economy, but at a great cost — hurling the nation into not just one recession, but two. Unemployment soared, stocks fell repeatedly, interest rates oscillated and, for a while, bonds looked shaky, too.

It’s worth looking at his era for guidance. 

First, because it had multiple, severe downturns, the Volcker era was disastrous for anyone who traded actively and bet wrong on the direction of the markets. Short-term trading is especially dangerous when the market’s currents are opaque and treacherously strong, as they were back then and may be now.

But, second, the Volcker era was wonderful for those with the patience and resources to ride it out. While Mr. Volcker’s stern treatment of the economy was deliberately disruptive, it ushered in awesome bull markets, in both stocks and bonds.

When Mr. Volcker became Fed chair in 1979, inflation was running above 11 percent annually, and the unemployment rate was almost 6 percent. A bull market in stocks had started in 1974 and it continued months more, even though the Volcker Fed had begun to tighten monetary policy.

On Saturday, Oct. 6, 1979, Mr. Volcker announced that, “No longer would the Federal Reserve set interest rates to guide policy,” Jeremy J. Siegel, the University of Pennsylvania economist, wrote in the book “Stocks for the Long Run.” “Instead, it would exercise control over the supply of money without regard to interest rate movements.”

By reducing the money supply, and letting short-term interest rates float, the Fed was, effectively, letting rates spiral upward.

“Stocks went into a tailspin, falling almost 8 percent on record volume in the 2½ days following the announcement,” Professor Siegel wrote. “Stockholders shuddered at the prospect of sharply higher interest rates that would be necessary to tame inflation.”

By March 1980, the Fed funds rate was an astonishing 17 percent, compared with just 2.5 percent today. It would exceed 19 percent the following year.

The economy slowed so much that it fell into a recession from January through July 1980.

But it wasn’t until Nov. 28, 1980, that a bear market in stocks began.

The S& P 500 lost more than 27 percent during a miserable 20-month period that ended in August 1982. If you were on the wrong side of that move, you lost a ton of money. The second Volcker recession began in July 1981 and lasted until November 1982.

If you hung in during the entire Volcker era, you experienced turmoil but went on to enormous gains in both stocks and bonds. From the day Mr. Volcker took office until the day he left in 1987, shares in the Vanguard S& P 500 stock index fund — the first lowcost broad index fund available to ordinary investors — would have gained 215 percent, according to FactSet data.

An index of the broad bond market, now known as the Bloomberg U.S. Aggregate, would have gained 143 percent in that period. And on the day Mr. Volcker started as Fed chair, the 30-year U.S. Treasury bond provided a yield of more than 9 percent — a guaranteed doubling of your money every eight years, if you had just held onto it. Even better, you could have bought a Treasury bond in September 1981 that paid a guaranteed 15.19 percent for 30 years.

There were big ups and downs in shorter stretches. They scared me away from stocks for a while.

What we’ve been experiencing over the last year is frightening, too. It’s not clear whether the July rally in the stock market was more like an early sucker’s rally in the Volcker era (leading to a recession and bear market) or like the second big rally — the one that became a great bull market. Or, perhaps, it’s another variation.

No one knows. But remember that those long-term bets on stocks and bonds paid off, even in that era of market turmoil.

- Jeff Sommer, New York Times (via Honolulu Star-Advertiser, 8/14/22)

bull rally in a bear market

(Reuters) - The U.S. stock market's rebound in recent weeks has analysts and investors questioning whether 2022's deep downturn has ended, but how to spot an expiring bear market or a new bull market is not something everyone on Wall Street agrees on.

Equities have rebounded thanks to better-than-expected corporate earnings and bets the worst of soaring inflation may be over. The Nasdaq (.IXIC) index's drop of about 0.6% on Thursday left the tech-heavy index up 20% from recent low on June 16, while the S&P 500 (.SPX) has also rebounded in recent weeks, now up 15% from its recent low in June.

The recent gains led analysts at Bespoke Investment Group to declare on Thursday morning the Nasdaq had exited its recent bear market, even though the index remains down about 21% from its record high close last November, with trillions of dollars in stock market value still lost.

On Wall Street, the terms "bull" and "bear" markets are often used to characterize broad upward or downward trends in asset prices.

Both indexes are widely viewed as having been in bear markets in 2022, but not all analysts define bull or bear markets the same way, and many investors use the terms loosely.

"We could write for hours on the semantics of bull and bear markets," Bespoke wrote in its research note, saying a new bull market was now confirmed to have started on June 16.

The Merriam-Webster dictionary defines a bull market simply as "a market in which securities or commodities are persistently rising in value."

Some investors define a bear market more specifically as a decline of at least 20% in a stock or index from its previous peak, with the peak defining the beginning of the bear market, which is only recognized in hindsight following the at-least 20% decline.

Similarly, some define a bull market as a 20% rise from a previous low, and by that measure, used by Bespoke, the Nasdaq could now be viewed as having begun a fresh bull market.

The Securities and Exchange Commission says on its website that, "Generally, a bull market occurs when there is a rise of 20% or more in a broad market index over at least a two-month period."

The Nasdaq's steep declines

S&P Dow Jones Indices, which administers the S&P 500 and Dow Jones Industrial Average (.DJI), has an even more nuanced definition of a bull market.

A drop of 20% or more from a high, followed by a 20% gain from that lower level, would leave an index still below its previous peak, a situation S&P Dow Jones Indices Senior Index Analyst Howard Silverblatt describes as a "bull rally in a bear market".

Analysts warn against relying too much on backward-looking definitions of market cycles that do little to capture current sentiment or predict where stocks will go in the future.

Factors like the velocity of the market’s rise or fall and how much average stocks have changed contribute to whether investors view a major move as a turning point in sentiment or a short-term interruption to an existing bull or bear market.

Indeed, investors can only be sure they are in a new bull market once a new record high has been reached, and at that point, the previous low would mark the end of the bear market and beginning of the new bull market, according to S&P Dow Jones Indices.

For example, during the bear market caused by the 2008 financial crisis, the S&P 500 (.SPX) rallied over 20% from a low in November 2008, raising hopes the stock rout was over. But the S&P 500 tumbled another 28% to even deeper lows in March 2009.

It was not until an all-time high was reached in March 2013 that investors were able to say with certainty that a new bull market had been born four years earlier.

"We retroactively go back and say, 'OK, when did the market hit the bottom?'" Silverblatt said. "That's when the bear would end and the bull starts."