Myths, Markets and Easy Money
“The easy money has been made.” If that saying sounds familiar, it’s because you’ve been hearing it over and over again since 2009…. In hindsight, the path higher since March 9, 2009 indeed seems like “easy money.” The S&P 500 has returned over +340%, including dividends. What could be hard about that? To answer that question, let’s take a look back.
Faced with the worst bear market since the Great Depression, [investors] were being told prices could go lower still. The case seemed airtight: earnings “drive” stock prices, and earnings were going down, not up. You see, as it turns out, stock prices lead earnings, not the other way around. By the time earnings data is released on the prior quarter, the market is already looking ahead. That’s precisely what happened in March 2009. By the time earnings turned back up in 2010, the S&P 500 had already surged substantially higher.
On May 6, 2010, in what will forever be known as the “Flash Crash,” panic selling and a waterfall decline ensued. Pundits said the severity of the decline was bearish omen. How could one have avoided falling prey to such prognostications? By basing their investing decisions on evidence. [Since] 1970, the average returns following 90%+ downside days are not only positive but higher than your typical day.
The biggest test would come in 2011. The S&P 500 would decline roughly 20% from May through October. Such a large decline could only mean another recession was coming. The only problem with such logic: Before 2011, we had seen eight bear markets without an accompanying recession since 1933. After 2011, this number would move up to nine.
The S&P 500 hit a new all-time high, and pundits starting saying that the new highs were pointing to a top. What evidence did they present supporting such a position? None. From that first high in 2012, the S&P 500 has gained 98%.
If all-time highs in 2012 didn’t scare you, “rising rates” in 2013 were said to be the “death knell” of the bull market. Confounding the experts, the S&P 500 would advance 32% in 2013, its best year since 1997.
In [late] 2014, the dollar experienced an unrelenting advance as markets began anticipating an end to Quantitative Easing. Since a falling dollar and easy Fed were said to be responsible for the gains since 2009, the opposite environment was said to unwind all such gains. The only problem? The S&P 500 and the U.S. Dollar Index have a zero correlation historically. The S&P 500 would end 2014 up 13.7%.
As the Fed hiked rates in December 2015 for the first time since 2006, it was the opinion of many that one should sell all of their stocks, particularly in Emerging Markets. Not only did Emerging Market stocks not suffer from the hikes as predicted, they would go on to outperform.
In early 2016, the S&P 500 experienced a sharp sell-off, hitting new 52-week lows in January and February. Such an occurrence was said to be extremely “bearish.” Near the market’s lows in February, another concern emerged: Many pundits suggested that “political risk” was high, and investors would do well to sit out the year. As election years have historically returned slightly higher than non-election years (9.6% vs. 9.5%), sitting them out would have resulted in a return 2.5% below a simple buy-and-hold. The S&P 500 would end 2016 up 12%.
This has been the least volatile start to a year since 1964. The constant barrage from pundits saying things like “the calm before the storm” and “this won’t end well” started in early January. What evidence is there that low volatility means stocks cannot continue higher? None. If all of this sounds confusing, good. It should be. No one said this game was easy.
The 21 corrections (of at least 5%) since March 2009 all seemed like the end of the world at the time. Each one was difficult to hold through. The only way you had any chance of holding your position was to tune out the noise (extreme forecasts, predictions, prophesies, targets and myths), have a plan, and stick with that plan when you were punched in the face.
— Charlie Bilello is the director of research at Pension Partners. Read the full article
A Contrarian Warning From Small Investors
Optimism about the stock market has reached the record highs established during the Dot.com bubble, just before it all fell apart. In the quarterly Wells Fargo/Gallup survey of investors with at least $10,000 in the markets, undertaken in early August when the Dow Industrials exceeded 22,000, investor optimism about the stock market did something very special—something it hadn’t done in 17 years: 68% of these investors said they’re optimistic about the stock market’s performance next year. This matches the prior records set in December 1999 and January 2000. Peak optimism occurred two and three months before one of the most epic crashes commenced in March 2000.
In late 1999-early 2000, high enthusiasm for stocks was a powerful sign the stock-market bubble was on its last legs. Of course, no one can say how much higher retail investors’ enthusiasm will surge this time around. But the current level has already left the optimism before the financial crisis in the dust.