Updated: Dec 18, 2024
I originally wrote this update yesterday morning (Dec. 18th) before the significant price decline in the afternoon. I want to comment on yesterday's market reversal before we look at the longer term trends discussed below.
12/18/24 DECLINE
The stock market experienced a sharp decline yesterday afternoon that began right after Fed Chairman Powell announced that there would be fewer rate cuts next year. The Fed is going to be more cautious in their rate cuts going forward because they are concerned about inflation.
The market was expecting more aggressive rate cutting in 2025 so this was seen as a negative surprise. Bond prices fell as well as interest rates increased after the Fed announcement.
The other surprise yesterday afternoon was the political maneuvering that introduced a last minute risk of a government shutdown. The bipartisan agreement recently reached on a short-term spending bill is being revisited based on pressure from the new administration. It is not clear yet whether this is a real risk or just posturing.
TWO YEAR TREND
The stock market has marched steadily higher over the past two years since the bear market bottom in October of 2022. It is easy to lose track of where we were back then and where we are today in comparison. Let’s look at the relative change in the S&P 500, the Nasdaq and the Russell 2000 since October 2022.
The chart below shows us how all three indices have steadily climbed over the last two years. The measure I am using is the relationship of the current price to the previous all-time high reached before the bear market of 2022.
For example, in early October of 2022, the S&P 500 was down about 25% from its previous all-time high reached at the beginning of 2022. In December of 2024 the S&P 500 is now 27% higher than it was at the beginning of 2022 representing a 3-year gain of 27%. The S&P 500 has climbed about 68% off the bottom reached in 2022.
Interestingly, the Nasdaq is now also 27% higher than its peak at the end of 2021. The small cap Russell 2000 index has taken three years to get back to its peak at the end of 2021.
If you have been aggressively invested in the stock market like our customers over the last two years you have experienced exceptional gains. The 2-year increase is 57%. The S&P 500 has steadily gained about 30% in the last year.
This level of increase in the stock market is quite rare historically. Most measures of market valuations indicate that the stock market is overvalued at present due to the large gains in the last couple of years. My valuation model suggests that the S&P 500 is overvalued by about 19% currently. In the last 50 years, the S&P 500 has only had higher valuations one time – in 1999 at the end of the dot-com bubble and before the dot-com crash in the early 2000s.
As I have mentioned previously, valuation is not a good predictor of short-term market direction. It is a good predictor of long-term market prices. Unless AI delivers increases in corporate profitability of 20%, the market will need to correct at some point. The stock market is currently betting that AI will deliver large increases in corporate profits. Time will tell.
In the near term, the stock market is keeping a watchful eye on economic growth and inflation. The market currently is assuming that inflation is stuck at current levels and that interest rates are stuck as well. The consensus is that the Fed will lower interest rates at a slower pace as they are concerned more about inflation than economic growth at present.
Bond prices were expected to rise as interest rates declined but bond prices (inversely related to interest rates) remain stuck at levels that are 20% to 30% below what they were three years ago.
The US continues to outperform all other global economies. GDP growth is stronger in the US and productivity growth is much stronger in the US.
Despite the positive trend in stock prices, we do expect more volatility going forward.
There is a great deal of uncertainty around the economic policies of the new administration, particularly with regard to inflation.
When markets are overvalued, any negative news can cause a steep drop in the markets. If you do not have a strategy to protect your money against losses like our Market Signals system, you need to be prepared to deal with higher levels of volatility in the coming years.
Stay Disciplined My Friends,
Phil McAvoy
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
How has your retirement account performed over the last 5 years?
Has it doubled? If it hasn’t, it should have come close to doubling.
If you follow the Asset Allocation approach that the industry professionals recommend, your account has only gained about 30% (not including contributions). In the table below, I used the Vanguard 2050 Target Date fund (VFIFX) to represent the Asset Allocation approach. Over the last 5 years, the Vanguard Target Date fund only earned an average of 5.5% per year.
Compare this to the S&P 500 which produced average annual returns of 13.9% over the same 5-year period. If you had simply placed all your 401K investments in the S&P 500, your account would have increased by 92% (not including contributions made over the 5 years).
Our Market Signals system generated average annual returns of 15.9% which would have more than doubled your money (+109%).
If you began the period with a retirement account balance of $500,000 and you followed the advice of a financial advisor, you would have added about $150,000 (not including contributions). If you simply owned the S&P 500, you would have added $460,000 (without contributions). The investment services professionals would have cost you about $300,000 by following their bad investing strategy. If we include contributions, the opportunity cost would be even greater.
If you had invested using my Market Signals system, your initial balance of $500,000 would have grown by 109% or by $545,000 to $1,045,000 (not including contributions). Compared to Market Signals, the investment professionals would have cost you about $400,000.
But the investment professionals will tell you that you needed to be diversified via the Asset Allocation approach to protect your savings against the volatility of the stock market. Let’s see how that worked out in the last bear market of 2022.
The Target Date fund lost 33% at its low point (drawdown%) in 2022. You would have had to watch your diversified portfolio lose one third of its value – pretty painful.
The S&P 500 by comparison had a drawdown (peak to trough) of 25%. This is also a big loss but less than the supposedly safer diversified portfolio.
The other key element to consider in bear market collapses is the Time to Recover. This measures the length of time between the pre-bear market peak to when the investment gets back to even. Losses are much more bearable if they don’t last as long.
The S&P 500 took about 2 years to get back to even – from January 2022 to January 2024.
The “safer” Target Date fund took 3 years to get back to even having just reached the pre-drop peak in December of 2024. So, the safer Target Date fund lost more money (33%) compared to the “riskier” S&P 500 and it took 3 years to recover compared to 2 years for the S&P 500.
My Market Signals system had the smallest drawdown at -12.5% at the October 2022 market low. And it would have only taken one year to recover to the pre-bear peak. You would have been back to even by January of 2023.
Market Signals would have reduced your peak losses by 20% (from -33% to -12.5%) and you would have recovered your losses a full two years faster than the Asset Allocation method.
The industry says that your risk of loss is greater when you seek out higher returns. In some cases, this is true, but it isn’t always true. In this example comparing Market Signals to the Target Date fund, Market Signals generated three times the profit while losing 62% less in the 2022 bear market and recovering those losses two years quicker.
The industry is dead wrong.
This example shows you why I am always criticizing the investment services industry for having terrible solutions for ordinary investors. The industry has trained you and everyone else to use this outdated and ineffective investing approach.
Their dumb investing strategy caused me to create my Market Signals Investing System which mostly invests in the S&P 500 but rather than “ride out” the losses in bear markets, my system shifts money into safer assets during bear markets.
Market Signals gives you the best of both worlds – large gains when the market is rising and smaller losses when the market collapses. There really is no other way to invest.
Stop following the foolish industry strategies. It is costing you big money.
If you currently own a mix of bonds and stocks and international stocks and small cap stocks, you are losing out on millions of dollars in retirement. These are facts and not opinions. It is common sense. Bonds are a drag on your portfolio. International stocks are a drag on your portfolio.
Stop the madness. “Riding out” your losses in bear markets with their Buy & Hold strategy is stupid.
If your average annual returns for the last 5 years were less than 14% and you did not double your money (excluding contributions), you are doing something wrong.
Start using Market Signals today. Click here to learn more.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
What a year it has been for the stock market. The stock market has marched steadily higher over the past year. Both the S&P 500 and the Nasdaq are now up over 30% for the last 12 months. Twelve-month gains of over 30% are pretty rare for the stock market. Don’t get used to it.
Our investing system has had our customers fully in the stock market over the last 12 months so they are sitting on 30% gains over the last year.
Both indices lost some ground at the end of October heading into the election. The market spiked after the election and has now dropped back and is now in line with the 12-month trend.
Economic data has been mostly positive recently although inflation worries are starting to creep back into the picture. The Fed is hinting at a pause in the rate cutting. Interest rates have actually increased about a half a point in the last two months.
Despite the positive trend in stock prices, we do expect more volatility going forward.
Our models indicate that the S&P 500 is overvalued by 16% right now. See the graph below. Market valuations are now slightly above where they were in January of 2022 before prices fell by 25% to 30% over the following ten months.
When markets are overvalued, any negative news can cause a steep drop in the markets. If you do not have a strategy to protect your money against losses like our Market Signals system, you need to be prepared.
On the other hand, some of the biggest gains in stock prices come at the end of bull market cycles. The biggest gains happen before the fall. No one knows when the next bear market will hit, but you can be assured that it will hit at some point.
Our customers win both ways. If the market keeps rising, they get the full gains and if the worst-case scenario happens, they are protected. The key is to protect the terrific gains we have all realized over the last couple of years.
If you are concerned about a major decline in stock prices, now would be a good time to check out our Market Signals investment system. Don’t wait until it is too late. You will regret it.
Click Here to learn more.
Stay Disciplined My Friends,
Phil McAvoy
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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