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S&P 500 - Worst Start to a Year Since 1939!


Parsad
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So the -13.5% or so start this year for the S&P500 is the worst since 1939, and would the 3rd worst start of the top ten in recorded history...only falling short to 1939 at -17.3% and 1932 at -28.2%!

 

https://www.marketwatch.com/story/a-rough-4-months-for-stocks-s-p-500-at-risk-of-booking-the-worst-start-to-a-year-since-1942-heres-what-pros-say-you-should-do-now-11651250525?siteid=yhoof2

 

Interestingly enough, in 8 of 9 years, excluding 2022 YTD, the S&P500 did not get any worse by year-end or recovered from modestly to dramatically.  Only 1973, it got modestly worse by year-end.  

 

https://www.slickcharts.com/sp500/returns

 

Doesn't mean there won't be further volatility this year...the market could drop another 20-30% from here...who knows?!  But the likelihood of the market ending much worse than now by year-end is historically only around 10%.  

 

Cheers!

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18 minutes ago, Parsad said:

But the likelihood of the market ending much worse than now by year-end is historically only around 10%.  

But now is a good time to have a high cash allocation?
 

You can hold cash forever, make a purchase, and have the market cut right through it shortly there after. Bottom line, and I don’t think it’s really disputable, is that holding any amount of cash for an extended period of time leads to underperformance. Even if you cherry pick the hell out of the historical data, there are very few actual prolonged periods where you’d have been better off hold it vs just rolling up the sleeves and buying something of quality at an average or better price. 

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1 minute ago, Gregmal said:


 

You can hold cash forever, make a purchase, and have the market cut right through it shortly there after. Bottom line, and I don’t think it’s really disputable, is that holding any amount of cash for an extended period of time leads to underperformance. Even if you cherry pick the hell out of the historical data, there are very few actual prolonged periods where you’d have been better off hold it vs just rolling up the sleeves and buying something of quality at an average or better price. 

 

But now is a good time to have a high cash allocation?

 

No, that would have been at the beginning of the year.  Now would be the wise time to start putting some of that money to work, and put further money to work if volatility and market drops continue.

 

You can hold cash forever, make a purchase, and have the market cut right through it shortly there after. Bottom line, and I don’t think it’s really disputable, is that holding any amount of cash for an extended period of time leads to underperformance. Even if you cherry pick the hell out of the historical data, there are very few actual prolonged periods where you’d have been better off hold it vs just rolling up the sleeves and buying something of quality at an average or better price. 

 

Yes, the main words are "extended period" and "prolonged".  No one is disputing that.  But selling assets as they reach intrinsic value and then waiting for fat pitches where they are below intrinsic value is not the same thing.

 

Cheers!

 

 

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Quote

Nasdaq Composite worst months...
1) Oct 1987: -27.2%
2) Nov 2000: -22.9%
3) Feb 2001: -22.4%
4) Aug 1998: -19.9%
5) Oct 2008: -17.4%
6) Mar 1980: -17.1%
7) Sep 2001: -17.0%
😎 Oct 1978: -16.4%
9) Apr 2000: -15.6%
10) Nov 1973: -15.1%
11) Mar 2001: -14.5%
12) Apr 2022: -13.3%

 

From @charliebilello on Twitter.

 

Sitting on a 10% cash position that I could deploy, but it's really difficult to know what the normalized earnings and interest rates will be. Many companies have overinvested (CVNA 🤣, NFLX 💩, AMZN ⁉️, FB 👀). COVID boost is fading. Inflation rising. The clock is ticking:

 

bild.thumb.png.835ea9fab5628932540c544bca30e43b.png

 

bild.thumb.png.862c90571b311375899790b708e7f408.png

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What matters is the Fed. If they are determined to squash Inflation, than we will continue this bear market with the occasional run up.  Will most likely get a recession as well.

 

In China there is a convergence of circumstances and we will soon see plenty of new policy and guidance to pump up that liquidity.

 

 

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17 hours ago, meiroy said:

 

What matters is the Fed. If they are determined to squash Inflation, than we will continue this bear market with the occasional run up.  Will most likely get a recession as well.

 

In China there is a convergence of circumstances and we will soon see plenty of new policy and guidance to pump up that liquidity.

 

 

China will have to follow US interest rates or abandon the currency PEG. They could well see a real estate crash, imo.

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With interest rates likely to rise substantially I think this is the year a -13% start ends up far lower. Regular PE ratio for the S&P 500 is biased by an unrepeatable COVID year profit spike. The Schiller PE ratio averages out earnings over multiyear periods and says we still have a long way to go.

 

image.thumb.png.c4bb30c4cf927575039de71aa1fa5206.png

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Posted (edited)

How do you classify earnings enhanced by COVID? It seems flawed to draw that conclusion because 1) Government and COVID stole a year of earnings in 2020 and for some companies most of 2021 earnings. Airlines for instance are just finally being able to fly without restrictions 2) the true COVID fad companies like peloton and zoom are off like 90% already. 

Edited by Gregmal
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3 minutes ago, Gregmal said:

How do you classify earnings enhanced by COVID? It seems flawed to draw that conclusion because 1) Government and COVID stole a year of earnings in 2020 and for some companies most of 2021 earnings. Airlines for instance are just finally being able to fly without restrictions 2) the true COVID fad companies like peloton and zoom are off like 90% already. 

 

First let me start anecdotally. We saw it in PCs, that market has been zero growth or shrinking over the last decade, but in 2020-21 showed huge growth for a year. This quarter they are all (except Apple) shrinking again. Car manufacturers can sell whatever they can make, as can chip makers.

 

Now for actual facts, total EPS for S&P 500 in 2021 was the highest in history and it's not close. About 40% higher than in 2019.

 

https://ycharts.com/indicators/sp_500_eps

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Yea there’s definitely beneficiaries but it’s harder to gauge what’s sustainable in some ways. People last year said steel/iron ore “had to” come down because it always does and that’s the cycle. Same for lumber. People claimed there was a real estate bubble in the US before COVID, during COVID, and after COVID. Entertainment for instance, secular tailwind pre COVID and now people can’t get enough. Outdoor related stuff…same thing. That’s what I’m having trouble gauging. 

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Posted (edited)
10 minutes ago, Gregmal said:

Yea there’s definitely beneficiaries but it’s harder to gauge what’s sustainable in some ways. People last year said steel/iron ore “had to” come down because it always does and that’s the cycle. Same for lumber. People claimed there was a real estate bubble in the US before COVID, during COVID, and after COVID. Entertainment for instance, secular tailwind pre COVID and now people can’t get enough. Outdoor related stuff…same thing. That’s what I’m having trouble gauging. 

 

Yes and just separating out inflation is a problem as well. Increasing prices 7% last year might have added more than 7% to earnings. Schiller's formula does attempt to adjust for inflation, but given I just got a 15% "market adjustment" raise 6 months into a new job (that started me at my highest salary ever) makes me wonder how accurate our current inflation measures are.

 

Edit for clarity: Schiller is also using ten year earnings so it might be less accurate when earnings are growing faster than usual. For example if the typical decade doubles earnings but the last decade tripled them its average earnings will be significantly lower than its most recent year than the typical decade. Given how much S&P profit margins have increased the last decade thats a possible issue.

Edited by ValueArb
clarity.
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Posted (edited)
2 hours ago, ValueArb said:

With interest rates likely to rise substantially I think this is the year a -13% start ends up far lower. Regular PE ratio for the S&P 500 is biased by an unrepeatable COVID year profit spike. The Schiller PE ratio averages out earnings over multiyear periods and says we still have a long way to go.

 

image.thumb.png.c4bb30c4cf927575039de71aa1fa5206.png


S&P500 is trading today 20% HIGHER than it was trading in Feb 2020 - hardly sounds like a bear market to me. Looking under the hood and many sectors - lots of tech - have been shot and left for dead down more than 65%. Lots of other sectors/stocks are down more than 35% - big banks, DIS etc. And you have Apple trading at a 27 PE multiple and Buffett buying more. Tesla, with a $940 million market cap continues to be a head scratcher for me. And sentiment is wickedly bearish. So many significant cross currents. Probably, the best course of action is to do the obvious - buy great companies when they go on sale. But to not be in a hurry, as it may take 6 or more months for the bear to finish its mauling of bond and stock markets.


Bottom line, if the Fed continues to aggressively talk down inflation - and hikes and reverses QE as fast as anticipated - and this causes interest rates to CONTINUE TO RISE then my guess is stock market averages will continue to go lower (likely driven by big tech). 
 

i am happy to trade the volatility with a chunk of my portfolio. Josh Brown has an interesting theory of how to play the market right now: buy when vix spikes to 30 (when everyone is panicking) and sell when vix gets close to 20. Rinse and repeat. 

 

Edited by Viking
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Posted (edited)

I really think this could be a -50% year for the S&P 500. Odds of it happening are probably only 1 in 5 but right now the Fed can't get any handle on inflation and their target interest rate levels have to be increasing with every lousy monthly report.

 

1972-1974 inflation grew from 3.3% to 11%. Dec 1972 to Sept 1974 the S&P dropped from around 800 to 350. The big difference is that interest rates were already 6% (Ten Year Treasuries) and only rose to 8%, so market didn't really think inflation was permanent then either (and rates came back down). They didn't blasted off until 1978 peaking at 15% in 1981.

 

So far this time inflation has from a lower starting point (1% to 8.5% in two years) and they have increased interest rates a little faster (0.5 to 3% vs 6-8%). And the Fed knows history, so they should get a handle on this much quicker. In 1973 the Fed was also dealing with coming off the gold standard, so they had no experience with what was to come.

 

Edited by ValueArb
1 in 5 makes more sense
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Eh 50% would be pretty wild. I could see another 10-15% maybe.

 

The Fed wants to control inflation why? The answer to that is the same reason purposely destroying the markets, peoples savings, job security, etc is of no interest to them. Not to mention most of this inflation is not solvable with any amount of rate hikes. Get the president to stop focusing on stupid shit like Ukraine, COVID, abortion and green energy and get supply chains and infrastructure fixed. Commodities are driving the inflation. It’s pretty freakin easy to understand that commodities are all supply and demand. Gas can go to $1500 a barrel and rent to $5000 a sq/ft, people still need both. If you price people out of both you create poverty/third world conditions. Why would they do that?
 

You can incentivize fixing the issues or you can just hand waive about broad “inflation” and rates. The politicians obviously don’t care but I think the Fed does have some understanding that raising rates for things such as the above becomes unproductive at some point. 

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3 hours ago, ValueArb said:

With interest rates likely to rise substantially I think this is the year a -13% start ends up far lower. Regular PE ratio for the S&P 500 is biased by an unrepeatable COVID year profit spike. The Schiller PE ratio averages out earnings over multiyear periods and says we still have a long way to go.

 

image.thumb.png.c4bb30c4cf927575039de71aa1fa5206.png

 

It's hard to go by Schiller or anything else, when government intervention distorts normal cycles.  Other than 2008/2009, when P/E's fell to slightly below median levels, Schiller has been wrong on the bull market for 12 years.  Only when government's stop interventionist policies will markets go to reasonable valuations.  But administrations would be too afraid to just stand by and let things correct themselves.  In the mean time, I agree with the idea that you buy things cheap and sell at fair value.  Cheers!

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Put another way, look at the beginning of the whole COVID ordeal. There were SEVERE mask shortages. You couldn’t get them if you wanted to and if you really had to, you got ripped off on pricing. What did we do? Incentivize the production of masks, ventilators, and all that junk. And what happened? Masks went back to normal prices, many places are now giving them away for free. The stuff people are all stressed out about ain’t all that much harder to produce than masks were. Building a house? Sure. Can’t do it overnight. Produce a fuckin 2x4, sheet of metal, or computer chip? Come on. 

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10 minutes ago, Parsad said:

 

It's hard to go by Schiller or anything else, when government intervention distorts normal cycles.  Other than 2008/2009, when P/E's fell to slightly below median levels, Schiller has been wrong on the bull market for 12 years.  Only when government's stop interventionist policies will markets go to reasonable valuations.  But administrations would be too afraid to just stand by and let things correct themselves.  In the mean time, I agree with the idea that you buy things cheap and sell at fair value.  Cheers!

It also makes sense for valuations to loosely get higher over time. Simply put, there is an expanding population and supply of money but a relatively fixed or substantially slower growing pool of desirable assets. Housing again is a good example of this. Good house on a good street in a great hood is just gonna go bottom left to top right if all else remains equal. 

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Labor markets for instance. How fuckin easy is it to responsibly be a world leader in practical immigration? Canada does this well. Instead we need a border circus breeding criminals. Literally, entering illegally is a crime. So the majority of the people we are encouraging to come here are criminals out of the gate. Why not fix the system and open the doors to people who want to do it the right way? Lots of people in Eastern Europe who probably want to take that up right now. Programmers and engineers. Blue collar….too easy. So yea interest rates don’t fix this either. 

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16 hours ago, ValueArb said:

With interest rates likely to rise substantially I think this is the year a -13% start ends up far lower. Regular PE ratio for the S&P 500 is biased by an unrepeatable COVID year profit spike. The Schiller PE ratio averages out earnings over multiyear periods and says we still have a long way to go.

 

image.thumb.png.c4bb30c4cf927575039de71aa1fa5206.png

I agree.  I very rarely short but I put on a short position on the s&P and nasdaq knowing the market may rally near term but the multiples have to come down when you compare to where the risk free rate is going.

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Posted (edited)

Rising US interest rates are starting to have knock on impacts around the globe. One is the strength we are seeing in the US$. Emerging market currencies are getting hit hard, especially those that are not resource based. Emerging markets have lots of debt in US$ That they will need to service and roll over in a depreciating local currency. Energy and food costs have shot higher. Is this development the canary in the coal mine?

 

The depreciation in the Japanese yen has also been nuts. The Euro is weakening. Super strong US$ is also putting China in a tough spot (their currency is pegged to the US$). Bottom line, higher rates in the US are becoming a BIG problem for the rest of the world. Hard to see how this continues much longer… before something important breaks.

Edited by Viking
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Posted (edited)

Great discussion of where the Fed is at today. “Powell announces Fed will ONLY move 50 basis points at each of next two meetings AND will start balance sheet run off June 1” and the stock market rallies 3% in one day. Apparently because 75 basis point increase is off the table. How far we have come…???
 

My favourite part of Powell’s Q&A was when he admitted he has NO IDEA how balance sheet runoff will play out in financial markets. Can’t make this stuff up 🙂 

 

 

 

Edited by Viking
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Proof will be to how high interest rates need to go to tame inflation.  It's quite pervasive and in all sectors of the economy.  I'm skeptical the long term average of 6% interest rate will slow this train!  

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15 minutes ago, ICUMD said:

Proof will be to how high interest rates need to go to tame inflation.  It's quite pervasive and in all sectors of the economy.  I'm skeptical the long term average of 6% interest rate will slow this train!  


i don’t think it will be inflation that stops the Fed from Increasing rates. I think the Fed will be increasing rates until something breaks. And that is when they will stop. Just look at the turmoil in financial markets from the past two months… The Fed has only raised the Fed funds rate by 75 basis points and they haven’t even started quantitative tightening yet. I continue to think the next 3 to 6 months are going to be very volatile for financial markets. 

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8 minutes ago, Viking said:


i don’t think it will be inflation that stops the Fed from Increasing rates. I think the Fed will be increasing rates until something breaks. And that is when they will stop. Just look at the turmoil in financial markets from the past two months… The Fed has only raised the Fed funds rate by 75 basis points and they haven’t even started quantitative tightening yet. I continue to think the next 3 to 6 months are going to be very volatile for financial markets. 

I think there are two issues:  1. Market uncertainty and the Fed managing expectations 2. What actually happens.

 

If there becomes a disconnect between 1 and 2, watch out!  I agree, there could be an ugly surprise ahead if fear reigns Supreme.  

 

I think of the Kondratieff cycle and wonder if we are entering the 'Winter' just before the credit crunch.

 

https://images.app.goo.gl/w8dZD8kofeSTz71j7

 

 

 

 

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