“You Can’t Predict. You Can Prepare.”
“The good news is that it is possible to build wealth during a secular bear market, but investors must first discard the buy-and-hold, indexing and passive asset allocation strategies that worked well in the secular bull market.”
The chart below shows the inflation adjusted US stock market over the last 200 years. It is worth studying closely because secular bear markets are in place around 30% of the time. It is also clear that all prior bear markets, with the exception of 2000, started at lower momentum levels than we have now.
Examining this more closely indicates that there is a non trivial probability of a secular bear market over the next few years that many investors are not prepared for.
Furthermore, the current downcycle is far from over as you’ll see.
It is also worth considering the impact of money supply on the stock market since the Federal Reserve was introduced in 1914. The chart below shows that the stock market has deflated in genaral for 100 years relative to M2 money supply and could be breaking down from its weak post 2008 rally.
Without the explosion of debt, enabled by record low interest rates from the Fed, and the growth of M2 what kind of stock market should we expect?
With the Fed now tied to reducing inflation, how much debt and M2 growth is likely, at least in the near term?
What Happened Last Week?
The Fed raised interest rates by 75bp, largely as expected, but abandoned forward guidance. The next meeting is almost 2 months away and although the Fed still talked about a “strong economy”, it did finally indicate some signs of weakness but Chair Powell stated “I don’t think the economy is in recession right now,”
Within a few hours the GDP data showed how out of touch Chair Powell’s statements are. Two consecutive declines in GDP were published for the first half of 2022. Since 1950, the US economy has always been in a recession when there have been two back to back quarterly GDP declines.
What Does the Current Data Show?
Consumer credit has exploded to record levels. Is this a sign of a strong economy or extreme distress? The following charts will indicate which is more likely.
Earnings growth is declining in the S&P 500 in the current quater with 40% reported so far. The downside direction has just started.
The last part of the cycle to turn is the labor market, and jobless claims are a leading indicator and seem to have turned towards weakness.
As discussed above, 2 negative back to back GDP growth data points.
How strong has the economy been since 2008 with all that stimulus? 16% below trend! Long term growth has clearly declined from its post 1945 pace.
The best predictor of growth is the bond market yield curve. It is currently at its lowest level since 2000.
This is a challenging and overall negative investment environment, but there will always be rewarding proactive cyclical opportunities to grow wealth. A Best Investor approach with risk management provides the optimal performance in any environment. As in sport, the best performance requires having a gameplan for both offense and defense. The key to success is understanding the relationship of business cycles and financial asset classes.
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