By Bob Wood, MMNS
Is the worst now behind us economically? The financial media is awash with opinions about the outlook for our domestic economic fundamentals and stocks, and weâ€™re hearing persistent arguments from both sides of the debate. Some see light at the end of the tunnel, while others see the tunnel itself collapsing at any moment. My opinion about this debate is that it doesnâ€™t really matter who is right!
That kind of thinking may strike you as rather odd. Iâ€™ll admit to that, but bear with me as I explain what I mean. Obviously, if the credit crisis is nearing an end, economic activity will lose a big constraint. Lenders would again aggressively continue to do what they do best, which is lending money and aiding consumer spending. And a rebound in the housing market would also remove a huge drag on our economy.
A housing market rebound could also alleviate some of the massive losses now endured by many of the largest financial institutions. These are the big banks and many brokers and insurance companies which hold too many mortgage-related investments that no one wants to buy — at any price. Potential buyers fear finding themselves with deteriorating assets.
Of course, no discussion about an economic recession would be complete without mentioning the stunning rise in the price of energy. (For those of you who have been invested in that sector — good for you!) But a cooling economy should, by definition, help reduce inflationary pressures, since, of course, consumers who choose to save will spend less, thus reducing demand. And so on the discussion goes, but none of it matters one bit!
Sure, weâ€™ll still get a steady diet of ramblings about these issues from media promoters, and your broker or mutual fund company will, no doubt, offer more reading material on these issues than you care to peruse. But no matter which way these issues break, whether in support of either the bullish or bearish case, none of it will change for stock market investors. Simply put, these discussions amount to nothing more than noise, and what it does is confuse investors.
To better understand my position, I suggest that you buy a copy of your favorite financial publication or even your local newspaper. Then, set it aside — without reading it — and pick it up again a week, or even better, a month later. See how quickly the information considered newsworthy just a short time ago becomes dated and of little value?
But since the financial media must have â€œnewsâ€ to fill all those hours of viewing time between commercials, we get a steady diet of information that becomes worthless in a few days. And that cycle is repeated daily.
As we all know, much of the information offered to investors is created by those with a vested interest in keeping investors optimistic about the potential for what they sell. The same premise applies to government-supplied data about the health of our economy. Much of that information is of no real use, yet we get a steady flow of it almost daily in the form of inflation figures, GDP estimates, job growth and federal budget deficit figures, among others.
Does it really matter which, if any, of these data points changes direction, rises more or less rapidly or exceeds expectations? For the most part, I donâ€™t think so! But one piece of information really does matter, and, as many times as I try explaining this point to investors, I come away dismayed at how few agree that my position has merit.
To me, the only thing that really matters is whether or not we are in the midst of a secular bull market. If we are not, then, by definition, we must be in a secular bear market. That, in a nutshell, is what we need to know. So can investors look only at that one piece of information, disregard the rest and still do very well in the markets?
Yes, I believe it really is that easy. Yet many investors, even other financial professionals, disagree with this premise, And their doubting stuns me each time it happens. To ignore the power of long-term trends seems an odd position, to say the least. To bypass the rich history of the markets and what it clearly shows is even more strange, yet the vast majority of investors – professional or not — do!
There it is — the one most important piece of information investors need, and they walk right by it. Instead, they tune in daily to CNBC or the nightly news and focus on all that meaningless data, which are bound to change within a few days or weeks.
History clearly teaches that the stock market goes through recurring trends that endure for about 20 years. Check out the 100-year performance chart for the Dow Jones Industrials to see what I mean. Or, for another view, you could look at recent history.
At the end of June, the Dow is priced at 11,339. This amount is slightly lower than where the Dow peaked at the end of the secular bull market in early 2000. Does this historical information square with the commonly-held belief that bear markets tend to last for about 18 months before a new bull market cycle begins?
Even more compelling is a look at a broader index, the S&P 500, now priced at 1,275, after topping out at about 1,550 in early 2000. After eight years of trying to garner a profit from our domestic markets, these losses are all we have to show for the effort, and that assumes that the average investor gets the full market return shown by those indices.
What this longer-term view clearly shows is that we are now in the eighth year of a bear market. And that is a distinct indication that weâ€™re in the throes of a secular bear market. For contrast, check to see how strong those markets were for the previous 18 years — with the S&P 500 rising from its bottom of just over 100 in the summer of 1982.
That wonderful secular bull market was preceded by a bear market that began in 1964, lasting roughly 18 years. Did it matter how good a stock picker an investor was during the 1964-1982 period? And did it matter significantly how poor a stock picker he/she may have been during the subsequent bull market beginning in 1982? It was the tide that mattered. The tide was the determining factor, more than any of those data points or economic trend changes reported ad nauseum in the financial media.
For me, investing in stocks during a secular bear market is like a real estate investor trying to profit from buying the best house in a bad neighborhood. The lower level indicators might be good but the higher level indicators control success.
Luckily, wherever we find secular bear markets — and none may be more obvious than our own domestic markets, viable options are always available to consider. When long-running bear markets exist in some places, long-running bull markets are usually available somewhere else. Finding the latter will do more for investors than hearing the next 100 or 1,000 data points reported by the media or repeated by your broker. But always keep in mind that these long-running bull markets are not necessarily easy waves to ride, with corrections and months-long consolidation periods a common theme.
Perhaps the best bull market right now is the precious metals sector. Another wonderful bull market has been the energy sector, though with the rising pain felt around the world from high energy prices, demand destruction is beginning to look plausible. As more consumers around the world look for ways to cut usage of oil and gas, I am reducing client exposure to energy stocks and funds. And I am moving the resulting cash into precious metals allocations. But, on any down move in oil prices, I may well buy right back into those solid looking shares.
When considering the domestic stock market in general, my thinking for the best thing to do is get away from it until valuations return to where they typically are at the end of a secular bear market. That usually means seeing an average P/E of under 10. With the S&P 500 still selling today at an average P/E of more than 20, much more pain could be in store for those preferring to focus on what matters little at the expense of what matters a lot.
Have a great week.
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., firstname.lastname@example.org.