Month: April 2024

April 29, 2024

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Risk 🔗 Reward

Dear Reader,

‘Investors are beginning 2024 at a precarious point.’

So begins Morgan Stanley’s 2024 U.S. Stock Market Outlook.

The carefully-worded report lays out three main reasons why investors need to approach the market cautiously this year:

1. U.S. stocks ended 2023 ‘overvalued’.
2. Overly-optimistic earnings forecasts & tapering economic growth.
3. Markets overestimating Fed rate cut agenda.

How, exactly, does Morgan Stanley recommend readers of its sage wisdom act on these bleak observations?

‘Balance expectations and portfolios by buying the equal-weighted S&P 500 Index or actively favoring value-style stocks, with a focus on financials, industrials, utilities, consumer staples and healthcare.’

Basically, buy the market, or buy a bunch of stocks from those five sectors.

In this email, we’re going to do two things:

First, let’s check in to see how markets are tracking since setting off from Morgan Stanley’s ‘precarious point’ on January 1.

Second, we’ll show you a few pieces of information that help long-term investors avoid getting caught up, bogged down, or bothered by reports such as that outlined above.

Stocks in 2024: The story so far

So far, four months into 2024, Morgan Stanley’s predictions of ‘an average year for markets’ appear to be wide of the mark.

The S&P 500: Up 7.5%

Source: Google Finance

NASDAQ 100: Up 7.8%

Source: Google Finance

Of course, these performance charts in no way tell us what might come next for the S&P 500 and the NASDAQ.

But, consider this:

Going down while going up (and vice versa)

Ben Carlson is the Director of Institutional Asset Management at Ritholtz Wealth Management (who manage about $2.5 billion of client capital).

Ben wrote a fantastic post last year titled Even When the Stock Market Goes Up it Still Goes Down.

In his post, he makes the case that investing is pretty much always confusing in the short term.

Even when stocks are trending higher, they can and do crash lower, or ‘draw down’.

Equally, when stocks are trending down, they can produce short-term price increases.

Ben also notes that since 1928, the S&P 500 has gained 20% or more in a year 34 times.

That’s 35% of the years up to and including 2023.

Of those 34 years, the index has corrected by 10% or or more in 16 of them.

In other words, nearly half the S&P 500’s strongest annual performances include a double-digit correction/drawdown.

Here’s the proof:

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In Ben’s words:
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‘Risk and reward are attached at the hip when it comes to investing. One of the reasons the stock market provides such lovely returns in the long-run is because it can be so darn confusing in the short-run.
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‘You don’t get the gains without living through the losses.’

We’ve written before in The Benchmark about so-called ‘dangerous short-termism‘ — the phenomenon that makes people, and investors, struggle to see beyond events and concerns that are immediately in front of them.

What Ben Carlson writes about living through the losses to get the gains, this next chart illustrates (over the much longer term).

Here’s the Dow Jones Industrial Average from 1915 to March, 2024:

​https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart​

As you can see, the index’s 2,217% return over the more than 100 years has not come without multiple massive crashes and downtrends.

The Great Depression crash and the protracted bear market in the 1970s stand out as the most dramatic drawdowns.

If you’re a newer investor, and you’re yet to develop the long-term view common to history’s most successful and wealthy investors, annual market forecasts like Morgan Stanley’s might scare you.

But as Ben Carlson shows, billionaire Kenneth Fisher’s statement that ‘time in the market beats timing the market‘ is a good general approach to the stock market.

Before we hammer on the point too much (although I’d argue it’s always worth considering such proof and observations, especially when dealing with difficult ‘drawdown’ episodes along the way), here’s one last visual for your consideration:

This one’s from Long Term Mindset writer Brian Feroldi:

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Decades > Years > Months > Days

Morgan Stanley and other Wall Street firms can predict, forecast and prognosticate all they want about what the market might or might not do.

But the reality is — for those looking to build wealth in the markets over the long term, at least — that what happens this month, or even this year, is of little relative consequence when you have your sights set on a bigger picture far beyond the short or medium-term horizon.

With ups come downs, and as Ben Carlson says, risk and reward are joined at the hip.

That’s it for this week’s The Benchmark email.

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Invest in knowledge,

Thom
Editor, The Benchmark
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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

April 22, 2024

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The S&P 500 in 2034?

Dear Reader,

Senior journalist and MIT Technology Review contributor Richard Fisher has been studying how humans perceive time.

Just as a child grows from only being able to imagine tomorrow, or next week, to eventually grasping the idea of not only their own life, but the distant past and distant future either side of it…

The whole human species’ sense of time has evolved with our civilization.

And yet, Fisher writes:

‘While we may have this ability, it is rarely deployed in daily life. If our descendants were to diagnose the ills of 21st-century civilization, they would observe a dangerous short-termism: a collective failure to escape the present moment and look further ahead.

‘So often it’s a struggle to see beyond the next news cycle, political term, or business quarter.’

The ‘short-termism’ Fisher notes is, of course, very much present in the investment world.

With their capital at risk, investors easily fall prey to a market’s daily, or weekly, or monthly volatility.

You don’t have to look far to find someone who sold early — or didn’t buy in the first place — because they fell into ‘dangerous short-termism’ instead of stepping back and trying to see the big picture.

Meanwhile, the big picture, long-term thinkers position themselves on the other side of such decision making.

As the king of long-term benchmark outperformance, Warren Buffett, says:

‘The stock market is a device for transferring money from the impatient to the patient.’

The market’s next year decade

In the spirit of highly-evolved, long-term thinking, let’s consider the idea of the ‘secular bull market’.

According to Investopedia:

‘A secular bull market is a market that is driven by forces that could be in place for many years, causing the price of a particular investment or ​asset class​ to rise or fall over a long period. In a secular bull market, positive conditions such as low interest rates and strong corporate earnings push stock prices higher.

‘In a secular bear market, where flagging corporate earnings or ​stagnation​ in the economy leads to weak investor sentiment, stocks experience selling pressure over an extended period of time.

The idea here, is that there are short and long-term cycles in markets.

And if, as Buffett says, the stock market transfers money from the impatient to the patient, surely it pays to know about these long term ‘secular’ markets, right?

Take a look at this:

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On the chart above, you can see the S&P all the way back to the 1920s.

Zoomed out that far, you can see the argument for ‘long-term secular trends’ in the stock market.

The argument basically goes that over the long term, the US stock market moves through periods of expansion and contraction that last about 16 to 18 years.

Viewed through this lens, you can make two observations:

First, there have only been two secular bull markets since the 1920s — one in the 1950s and 1960s, and another in the 1980s and 1990s.

Second, those ‘expansionary’ periods preceded periods of contraction, which you can see marked by red text.

These are inflationary or deflationary periods where stocks basically grind sideways over the long term.

The last two contraction periods for the market occurred from the mid 1960s until the early 1980s and from the late 1990s to about 2014.

So going by the chart, we’re in a secular bull market right now.

Could stocks rise for the next 10 years?

Some of the most experienced investors and fund managers on the planet right now certainly think so.

Robert Sluymer has been analyzing and forecasting financial markets for some of the largest institutions in the world for more than 30 years.

Late last year, he went on record with his prediction for where the S&P500 — the biggest in the world — is headed in the next decade.

‘The long-term secular trend for US equity markets remains positive with an underlying 16 to 18 year cycle supportive of further upside into the mid 2030s, potentially to S&P 14,000.

‘The S&P could move toward 14,000 by 2034 which is when we expect the current 16 to 18 year secular bull cycle to peak.’

Bank of America technical strategist, Stephen Suttmeier, has a similar take:

‘The secular bull market breakouts from 1950, 1980 and 2013 suggests that the S&P 500 can spend much of 2024 north of 5,000. This corroborates bullish pattern counts for the S&P 500 near 5,200 and 5,600, respectively.’

This chart shows the 1950 and 1980 secular bull markets with the 2013 (current) one overlaid:

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‘Patience is bitter…’

‘Patience is bitter, but its fruit is sweet.’ So said Swiss political philosopher Jean-Jacques Rousseau.

This email is not arguing for or against the view that the stock market is going to rise for roughly the next 10 years.

The point is that, either way, taking a step — or a few steps — back from the day-to-day behaviour of the stock market can give you a fresh perspective and appreciation for time.

Take a look at this chart, showing the number of times the media called the top of the market between 2009 and 2017:

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Nine times, these publications claimed ‘the easy money has already been made‘. And all nine times, stocks kept climbing.

As Richard Fisher observes, it’s the more highly developed and evolved among us who can grasp the bigger picture and appreciate timescales beyond ‘dangerous short-termism‘.

And if, as Buffet says, the market merely moves wealth from the impatient to the patient…

Then perhaps it’s useful to make sure we’re among the latter, rather than the former.

Now…

You’re still reading, so I’m going to presume you found this email useful, or interesting, or maybe even both.

If that is the case, it would make our day if you’d help us make someone else’s — forward this email on so we can share The Benchmark with more great readers.

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Invest in knowledge,

Thom
Editor, The Benchmark
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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

April 15, 2024

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Investing, Fast & Slow

Dear Reader,

Welcome to The Benchmark!

You’re reading this because you joined the Navexa mailing list.

Which means you have, at the very least, a passing interest in investing, the markets, and building wealth.

Which means that — we hope — you’ll find this email informative and entertaining.

Here’s why:

Mission statement

‘An investment in knowledge pays the best interest,‘ as Benjamin Franklin said.

That statement sums up why we’ve launched this email.

Each week, we’ll write to you with stories, ideas and content that offers some insight and/or perspective to what’s happening in the markets and the wider investing world.

These will include (but not be limited to):

• Stories about the history of money, wealth and economics.
• Notes on current events moving markets.
• Interviews with our global network of HNW investors, traders, analysts and digital asset pioneers.
• Analysis & comparisons of investment strategies
• Answers to your questions

The Benchmark will not be making investment recommendations, nor providing financial advice.

Our aim is to provide investing knowledge that ‘pays interest’.

While this isn’t an investing email for beginners, necessarily, we should start with some basics.

And it doesn’t get much more basic than why we invest in the first place.

Check out this post:

The case for investing, in starkly simple terms.

If the idea that investing is essential to building real wealth, as Willy Woo so clearly shows, resonates, then this email is for you.

But, hang on a second.

Why The Benchmark?

This is why:

From 1965 to 2023, Warren Buffett has achieved an annualized return of 19.8%.

Compare that to the S&P 500 index, which has returned 10.2% a year.

Buffett has ‘beaten the benchmark’ by 9.6% for nearly six decades.

That might not sound like much to the average, short-term thinking, investor.

But let’s take a look at what that delta means in dollar terms.

The S&P 500’s 10.2% annualized return turns a $100,000 investment into just shy of $28 million.

Not bad right?

Most of us wouldn’t turn our noses up at that prospect.

But what about the Oracle of Omaha?

Well, the result of his 9.6% outperformance over those 58 years probably have something to do with the look on his face in this photo:

Warren ‘The Benchmark Beater’ Buffett

Because 19.8% a year, for 58 years, turns $100,000 into more than $3.5 billion.

Even with six decades of inflation accounted for, that’s still an exponentially larger sum than $28 million.

That 9.6% outperformance, over that timeframe, amounts to the $3.2 billion difference.

In other words, consistent long-term outperformance has exponential, real-money, consequences.

That’s why we invest in the first place.

It’s why we built the Navexa portfolio tracker.

And it’s why we’ve launched The Benchmark — to deliver ideas, stories and perspectives that will help you become a more effective and complete investor.

Quote of the week

‘Money does not buy you happiness, but lack of money certainly buys you misery.’ — Daniel Kahneman

The headline for this email comes from the late Daniel Kahneman, who died earlier this year. Daniel’s book, Thinking, Fast and Slow, released in 2011, was the culmination of a life spent exploring human decision making.

He won the Nobel memorial prize in economics in 2002 ‘for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty‘.

What now?

Next week, we’ll dive into the stock markets, exploring where they’ve been, where they’re at, and where they’re (possibly) going.

If you enjoyed this email and you’re looking forward to the next one, then be sure to whitelist us in your inbox, and, if you have a spare five seconds, send us a quick reply with any questions or comments you have for The Benchmark.

Invest in knowledge,

Thom
Editor, The Benchmark
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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

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