“It’s not that I’m so smart. But I stay with the questions much longer.” – Albert Einstein
Where are we, at the end of November 2021?
The months seem to be alternating up and down and the questions persist about future developments. I’m accustomed to seeing divergences, but in November it seemed ridiculous. The vast majority of the stock market by number of companies (see NYSE composite and Russell index) was down around 4% in November, due to concerns largely about Federal Reserve policy and Covid. The Federal Reserve chairman made some statements about possibly raising interest rates sooner than later. Raising interest rates would be a painful way to kill inflation (remember the early 1980s?) but inflation serves an indispensable purpose – it makes it easier to pay off government debt with cheaper dollars. I believe personally that the low interest rates stick around along with the inflation. This would bode well for the stock market since it tends to hedge against inflation, but the market is still not totally in concert – small companies will always lead the way in a healthy market. In November, a very few large companies led the way to a small loss for the S&P and marginal gain for the Nasdaq.
How Did the Markets and Our Funds Do in November 2021?
“If you can’t explain it simply, you don’t understand it well enough.” – Albert Einstein
Where are we, at the end of December 2021?
The funds that led the way in November lagged badly in this month. The great development is that the smaller companies led the way, which is a HEALTHY development. No healthy bull market can long persist without leadership from small companies. We have inflation and that’s not to be preferred but the stock market is not unhappy about it, even if personal incomes are upset and disrupted. Technology fell very flat, and there is evidence that it may finally be falling back, moving out of favor. Money seems to be moving toward so-called “value” plays, where dividends and income are strong. We’ll be watching this trend. Our dividend stocks did well.
How Did the Markets and Our Funds Do in December 2021?
“He/she that would live in peace and at ease, must not speak all he knows or judge all she sees.”. – Benjamin Franklin, Poor Richard’s Almanack, 1736
Where are we, at the end of January 2022?
The month of January was brutal for the stock market, even considering that month-end was sharply higher. January seemed to confirm that there is a shift underway that may not snap back the other way – Nasdaq was down about 9% while “value” stocks (look at Fidelity Large Cap Value, below) were down much less or down only marginally. That’s a HUGE difference. It is troubling also that the Russell 2000 (small companies) was down about 10% – small companies should lead the way in a healthy bull market. So, our diversified portfolios reflect all of this to varying degrees but overall, it was a bad month – possibly portending trouble ahead.
We have not had a true bear market year for a very long time. Could 2022 be the year? As I’ve said many times, bear markets are a PROCESS, meaning they don’t just happen in a hurry. Be assured that I will be watching.
Interestingly, our dividend paying stocks were hurt the least of everything we hold. Why was that? I believe that investors feel that well established, dividend paying companies and securities are the best defense against inflation and uncertainty, which is our fate right now. If you are in a 401K, your account did much better if you are in a brokerage account, where we are able to hold dividend payers.
How Did the Markets and Our Funds Do in January 2022?
“The average man/woman is both better informed and less corruptible in the decisions he/she makes as a consumer than as a voter at political elections.”. – Ludwig von Mises”
Where are we, at the end of March 2022?
The problem with reporting the returns of the S&P 500 as a representation of the stock market is that half of its weight and investment return is created by only 10 companies (the 500 companies are not equal weighted!). Usually, when the economy is headed for trouble, money heads in the direction of very large, established stocks, for hoped for safety. Appearances can give a false sense of security. This was the case in 2007 – 2008, when the big companies tumbled last. Readers of the news may also be aware of the “yield curve inversion”, an apparent warning sign of coming recession. This happens when short term interest rates (currently being raised by the Federal Reserve in response to inflation) are higher than long term rates. That signal is generally accurate but can be 2 years in the making. Interestingly, the stock market often does great during the intervening time.
As usual, all the above means we live in interesting and rather unpredictable times. In addition, the bond market is tumbling, and it’s been difficult to make money with fixed funds! We have averaged between breakeven and 1% on our fixed returns (thank you dividend payers). Even Starwood and Blackstone “only” returned 1+% for their most recent month. I do NOT consider the March numbers to be proof that this correction is over.
In March, I added the Astoria Inflation Protection ETF (PPI) to almost every account. As the name implies, it consists of companies that are positioned to benefit in times of inflation. I also added or increased holdings in energy for almost every account. These are hedges. (Note that if you are in a moderate or conservative portfolio, the stock returns are mixed with fixed returns). Notice the wide disparity in returns among some very good funds.
How Did the Markets and Our Funds Do in March 2022?
“We don’t have a global inflation problem… China, Japan and Switzerland also face elevated oil prices, supply-chain problems and fallout from the war in Ukraine, but their annual inflation rates are 2.1%, 2.5% and 2.5%, respectively. They have avoided the ravages of inflation because their central banks haven’t produced excessive quantities of money.” – Wall St Journal, June 5, 2022
The Stock Market: What’s Going On?
Much has happened since my last newsletter. April was a bad month and May was becoming even worse. I actually wrote a special newsletter on May 20, letting people know my thoughts and the actions I was taking. At the time, the S&P and Nasdaq were down a lot. Then, the current rally started, so it seemed just as well to wait.
Here is what I have done this year and what I have not done: I’ve eliminated all growth and technology funds in favor of safer funds that naturally feature dividends and stability, and I’ve added holdings that benefit from inflation and rising energy prices, such as Fidelity Select Energy (FSENX), Astoria Inflation Protection (PPI) and Victory Shares Enhanced Volatility (CDC). What I have not done is move the accounts at least partly to cash. Knowing when to sell into cash and when to buy back in is very difficult. The markets can gain or lose 10% in a matter of days. The aforementioned funds are actually making money this year and that’s a good thing. In fact, energy stocks are still relatively underpriced, even considering the large runup this year.
Our floating rate funds lost money. This has been very frustrating because USUALLY fixed return funds diversify stock funds and help protect against declines. It seems that every month I comment on how we live in strange times.
Whether this downturn becomes a recession is the question driving the markets up and down right now. There are differences of opinion on both sides, as there always are – if everyone agreed, stock prices would already reflect that agreement. My own opinion favors the recession argument because inflation is only becoming worse. Inflation bedevils forward planning and can easily lead to overexpansion by business which then leads to corrective contraction, which is what a recession represents. The Federal Reserve is raising interest rates in an attempt to cool off inflation, but an increase in the cost of money hurts businesses that rely on credit lines and loans in order to grow and create products. Everyone (including home buyers) was living in a world of near zero interest rates and now things are very different. The slowdown begins with consumers and then moves to businesses.
Those of you who read this newsletter regularly will remember me bemoaning the printing of money over the last 2+ years. It’s simple economics. Print money – get inflation. If it weren’t so, we could simply print everyone into multi-millionaire status.
“The truth is rarely pure and never simple.” ― Oscar Wilde, The Importance of Being Earnest
“Politicians are like diapers, they need to be changed often, and for the same reasons.” – Mark Twain
The Stock Market: Is the Decline Over With?
This is what everyone wants to know, along with questions about inflation, recession, disease and just about everything else. On the subject of the stock market, there is much evidence, based solidly on market history and statistics, that the current rally is not likely to last. HOWEVER, it might. My biggest problem with market statistics and history, is that the history of bear markets does not amount to hundreds of data points, but maybe two or three dozen at most – every so many years, looking back some number of decades. Statistical analysis commonly wants hundreds of data points, if not more. The same ideas pertain to recessions where certain statistics predict a very deep slide and others predict something shallow. And of course, would our politicians know, and would they say?
June was horrific and July was excellent – although the New York Stock Exchange Composite lagged behind the more focused sectors. I had gone partially to cash and partially to “safer” funds such as consumer staples and utilities. Who could know in late June that this rebound would take place and how far it might run?
I’ve started to implement something new and different in most of the accounts (larger accounts). I’ve created a group of currently very strong funds (and Apple stock) within the accounts which I can buy and sell much more nimbly. I’m able to do it using my own software. For now, this group includes a Utility fund, an S&P 500 fund, a Nasdaq 100 fund, a small company fund and Apple stock (FUNY, SPY, QQQ, IWO and AAPL respectively). I am watching these daily with specific controls on them for strength and weakness. I will add to this group gradually, sell them as necessary and periodically rotate to stronger funds. If this concept works, i.e. keeps us away from a major decline while making us more money during periods of strength, then I will expand its percentage of holdings in the accounts. At the same time, I’ve sold, or am selling the other ETFs that I’ve held more for safety, but which obviously missed most of the July rally. They are transforming into this new program.
Other than this, the accounts remain positioned predominantly in “value” funds, which have been stronger and safer this year than “growth”. However, in July, as you can see below, they were not as strong – therefore I am creating some representation in technology and growth again. Our fixed funds made money, just much less than the stock funds.
Final point, even if this is just a bear market rally, it could still last for a period of months, and we just cannot afford to miss it.
How Did the Markets and Our Funds Do in July 2022?
“Smooth Seas Do Not Make Skillful Sailors” ― African Proverb
“A good head and a good heart are always a formidable combination.” – Nelson Mandela
Current State of the Markets?
In the last newsletter, I talked about whether the June market lows would be the final bottom. We still don’t know the answer, but stocks started to sell off very aggressively on August 22 and it continued right up through Friday. Will we make it all the way back down to the lows we hit in June? No one knows, but for now, it’s all about caution. I do think the odds favor further declines. Of course, it doesn’t matter what I think or why, but since you asked, it’s about inflation, deficit spending, economic weakness, higher interest rates, unfolding global recession and worldwide energy shortages. It’s a supply/demand crisis – demand being destroyed, and supply being impeded. Fill in your favorite causes.
September is seasonally very weak, and I think caution is called for until after the elections, at which point we may be ready for a rally – a “playable bounce” in a difficult landscape. Bear markets tend to show very high gains once they end and patience + defense pay dividends eventually.
For the month, the general averages were mostly down approximately 4%, plus or minus. We were down around 2%, plus or minus. For those with smaller accounts, we stayed pretty much with the utilities and consumer staples, which also beat the averages.
I implemented a new program during the month of August, for 64 accounts. You may already be in it. I prefer accounts over $200,000 that take advantage of free commissions (may require choosing email for all Fidelity correspondence). I utilize price movement and statistics very carefully. I have a learning curve for sure, but for the entire month we enjoyed better performance (translate: less money lost) than the greater market. As of month end, the program has the accounts holding a large amount of cash – due to the weakness that started after the 22nd.
Many of you are invested in Blackstone and Starwood (BREIT and SREIT) and are grateful that they have made money this year – while diversifying your overall holdings. Blackstone has a new program (as of last year) which pays a pure dividend income of approximately 8.1%. Unlike BREIT, it does not have much appreciation potential and there are no tax deferral benefits for taxable accounts. HOWEVER, it’s a good choice for creating steady, predictable income with minimal volatility. Blackstone does a good job creating these portfolios and is a huge, experienced provider. This “new” program is already about $45 billion in size. Let’s talk about this as a possible option – especially if you like the sound of it.
How Did the Markets and Our Funds Do in August 2022?
“…the number of stocks in deep bear markets, 30% or more below their highs, reached ever greater levels last week. If a market is on the mend, or even about to turn higher, this figure should contract, not expand” ― Lowry’s Institutional Research Analysis 10/07/2022
“…the weight of evidence, does not yet support the beginnings of a lasting advance.” – Lowry’s (ibid)
Current State of the Markets?
Some of you emailed me about the big up days that occurred early last week – Monday and Tuesday – the thought being that the pain was over. The fact is, “market noise” is very typical in bear markets. In September 2008 there were two back-to-back ‘up’ days just like that. Then, THREE sets of similar back-to-back gains in late November and early December 2008. Buying back into the market then, meant waiting until mid-2009 to break even on that. It rarely pays to invest according to news headlines. Typically, when a bear market really ends and turns back up, there are out-sized opportunities to buy on the cheap. For now, I’m maintaining a larger amount of cash (money markets) and looking at certain “hedged” funds in order to stay somewhat invested and remain patient. We also have 2 new private, stable interest-bearing funds.
What the markets want to know is when the interest rate tightening will end, and second, how deep the recession will be (global and U.S.). The old saying is “The markets will stop being scared when the Federal Reserve starts being scared” – which means when the central bank starts to fear real damage, to employment, corporate profits, consumer spending and income, THEN it will resume market friendly policies with regard to interest rates. It is already unprecedented to raise interest rates in a period of economic weakness.
September was a very bad month, with the averages falling 9 – 10% and more. But more telling, the best dividend paying stocks – the ones that should be at least SOMEWHAT safe in a downturn were hit almost the worst. The so called “dividend aristocrats”, i.e. companies in the S&P 500 that have raised their dividends in EACH of the past 25 consecutive years, were down 9.15% in September.
Final point: Fidelity is about to offer a “private” (meaning not on the stock market) credit fund that preliminarily may pay a dividend around 9%. It should offer a fairly stable principal because it is private. I will be learning about this fund on Thursday October 13th. It will be somewhat similar to the Blackstone Credit fund that I mentioned last month. Please contact me to get on my calendar to discuss.
“The human brain is an incredible pattern-matching machine.” – Jeff Bezos
How Did the Markets and Our Funds Do in Feb 2023?
It’s really true that all everyone is trying to do is match patterns. When the economy does “this”, when the Fed does “this”, when inflation is like “that”, then the stock market does such and such. The problem is that the patterns are incredibly complex, and the histories are not always easy to match. We have to realize that we are not analyzing 10,000 instances of a simple event, like cars crossing a bridge.
I observe that the market seems to WANT to declare an end to the decline and resume an upward march, but then the Federal Reserve keeps reminding us that it really is serious about raising rates and the market reacts negatively. Is it time to take them seriously?
When there are conflicting indications of market direction, the appropriate action is to maintain a certain diversified allocation among different investments, along with keeping a healthy percentage in safe holdings. We are using a lot of Treasury Bills now (as is the case in the entire investment world today) because the 6 month durations are yielding close to 5%. It’s like waking up in the 1980s.
On average, the indexes lost about 3%. Following is our fund performance in February:
