The Rational Stock Market theory states that the experts have already incorporated all the relevant information into stock market prices. If there is going to be a recession next year, they are already including that impact in their market values. If inflation is going up and down, they have that covered. If the global economy is slowing down, that too is reflected in the current prices for stocks.
If the market makers are really that good, why does the stock market move up or down by 5% on a given day when an economic report comes out only to be followed by a drop of 4% the following day? If corporate profits grow by an average of 8% per year, why does the market drop by 40% in a matter of months only to reverse course upwards by 50% or more over the following years?
All you have to do is look at charts of stock prices to see that emotions and the herd mentality move the market in the short term, not reason. For centuries, the stock market has been the best place to invest your money compared to just about every other investment. But it can be painful to invest in the stock market. The stock market is not rational in the short term. Investing in the stock market can be maddening but the volatility of the irrational market presents a big opportunity to make higher returns.
In the chart below, we compare the actual performance of the S&P 500 for the period between 1995 and 2021 to what a “rational” market would look like. For the rational market, we smoothed out the chart by using the average annual return of 8% that the S&P produced over this time. The orange line represents a market that produces steady returns. The blue line is the actual stock market performance. Over the long term, the S&P consistently produces average annual returns between 7% and 8% excluding dividends. This period was no different. When the blue line is significantly above the orange line, the market is irrationally bullish. When the blue line is significantly below the orange line, the market is irrationally bearish. This illustrates perfectly how people are constantly over-reacting to news and events. Corporate profits grow by 8.7% per year over time which is consistent with the growth of the stock market over long periods of time. So, in the long term, the stock market is rational. But in the short term, the market is anything but rational.
Look at how overvalued the market was in the late 1990’s and early 2000’s. A rational market would have valued the S&P 500 at $709 in March of 2000, but the irrational investors valued the S&P at more than double that amount - $1,499 at that time. This was during the height of the dot-com bubble when everyone was saying things were “different” this time. The collapse of the housing and mortgage markets in 2008 sent the S&P well below a rational valuation. A rational market at the beginning of February 2009 would have valued the S&P 500 at $1,437 yet rampant fear created an actual value of the S&P that was half that level - $739. We moved from a market that was overvalued by 100% in 2000 to a market that was undervalued by 50% in 2009. Even though the market experienced strong gains between 2009 and 2021, the blue line stayed below the orange line until the end of 2020. A chart like this one gives you an indication of whether investors are overvaluing or undervaluing the market.
So, we are left with this awful Catch 22. We have the stock market that is a great place to invest (annual returns of 9% to 10% with dividends reinvested) and we have the stock market that can drop by 50% or 60% in a matter of months and stay in negative territory for six years or more. If the market were truly rational with market values closely following the orange line in the previous chart, using a Buy & Hold investing strategy would be just about all one could do. Investing would be easy and painless. But because the market is irrational, a Buy & Hold strategy is painful.
The next chart compares the price of the S&P 500 to a “fair market value” or rational market value from the middle of 2021 thru November 2024. Notice how the market was significantly overvalued in January of 2022 and that the bear market of 2022 brought the market to under-valued territory in October of 2022. You’ll also see that the large stock market gains since October of 2022 until now have created an overvalued situation. The stock market has not been this overvalued since 1999 during the dot-com bubble. When looking at these charts, does stock market pricing look rational to you? Are your investments protected against big losses if the market drops significantly from it's current overvalued level? Hopefully, this information helps you understand why you need an investing strategy that deals with the irrational financial markets.
There is a better way. We don’t think it makes sense to watch your investments get cut in half during one of these downturns that happen every six to seven years and then wait four or five years for your investments to get back to even. The wild swings in stock values present an opportunity to make more money in the stock market. It is emotional human behavior that creates these wild swings, and that irrational human behavior is something that is very predictable.
We figured out a way to exploit the volatility. You can reap the rewards when the market appreciates excessively, and you can sidestep the irrational bear market collapses. In a truly rational market that steadily climbs by 8%, you could only make 8% per year. Because the market is not rational, you can make much more than 8% per year. The trick is to ride the wave of the long, high growth bull markets and to avoid most of the pain of the bear market collapses. If you believe in market cycles and you are worried about how your investments will get crushed in. the next bear market, you need to get Market Signals. We created our Market Signals newsletter to show you how get the high growth of the stock market and to avoid the bear markets. You can subscribe by clicking here.
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.
The month of April has been one of the most volatile periods ever in the stock market. The tariff confusion has accelerated the downward trend and has led to some erratic daily price moves. As of Friday April 18th, the S&P 500 is 14.2% below its February peak. The Nasdaq is down 18.9% and the Russell 2000 has dropped 17.6%.
The daily swings in both directions have been extreme. We have seen eight daily moves in the S&P 500 greater than 2% in just the last three weeks. The volatility has continued this week as rumors of the Administration backing off the tariffs have been floated.
The financial markets and the big corporations have been exerting a lot of pressure on the Administration to make changes to their tariff policies. The financial markets have been also exerting pressure on the Administration to back off from removing Chairman Powell from the Fed. At the end of the day, money talks in our world and the big money players will continue to lobby for policies that are beneficial to the financial markets.
Markets hate uncertainty and uncertainty is all we have had recently.
Financial markets are very sensitive to the kinds of policy changes that have been introduced over the last couple of months. Financial markets can react in unanticipated ways to all of these changes. Volatility in the bond market and the value of the US dollar caught the Administration by surprise and seem to have tempered the policy changes.
Hopefully, the moderation of the policy changes can limit the damage, but it may prove difficult to control the damage unleashed on the global markets. The reaction of the stock market this week seems to indicate that investors believe that the damage has been contained.
Unfortunately, the volatility will continue until we see more clarity on the Administration’s policies. I believe that the big money players will be successful in their efforts to limit the damage, but it is unclear how long this may take.
Investing is hard enough, but it is almost impossible when market moves are being dictated by rumors and tweets.
We will continue to ignore our emotions and stick to what our models are telling us. Trying to anticipate and predict the wild swings in policy is impossible and playing that game will lead to problems. It can be painful to stay committed to your long-term strategy at times like this, but it is important. Stay disciplined and follow your long-term strategy despite the recent volatility.
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.
These are trying times for individual investors. We reached bear market territory on the S&P 500 on Monday. Seeing your life savings drop by 20% in less than two months is difficult for all of us.
Stock market collapses like this one seemingly come out of nowhere. They happen for all sorts of different reasons:
Financial System Collapse (2008)
Overvaluation Bubbles Bursting (2001)
Pandemics (2020)
Inflation Spikes (2020)
Global Trade Wars (2025)
Nobody can predict the timing or the cause, but market collapses happen about once every five or six years on average. They can be very painful emotionally and financially.
The average price decline of bear markets is 37% with some as high as 55% or as low as 25%. The dot-com crash lasted 7 years and the Covid crash only lasted six months. The average length of a bear market is 4.5 years. That is a long time to wait for your account to get back to break even.
I give a lot of investment advice so I thought it would be interesting for you to hear how I manage my own money in times like this.
Prior to 2019, I struggled mightily with my investing strategy. Like many of you I tried and failed with all of the approaches pushed by the investment professionals. I was very frustrated with the lack of effective solutions. I hired and fired all of the big and small money management firms. I didn’t think it was a good deal to pay them a 1% fee to create a Target Date fund that I could build myself.
I wanted the high long-term returns of the stock market, but I couldn’t stand the old “Buy & Hold” approach. It made no sense to me to sit and watch my money drop by 40% and to simply wait five years for the market to recover. I painfully recall losing half my money in 2008.
It is still mind-boggling to me that Buy & Hold is the best strategy that the investment industry has to offer.
I bet you don’t feel great right now having the industry tell you to just “Ride it Out”.
I was forced to create my Market Signals system back in 2019 because the industry has no investing solution that provides both high growth AND protection against losses. They offer high growth strategies that come with large losses in bear markets OR they offer low growth strategies that are exposed to less risk and fewer losses. Nobody offers the best of both worlds – until now.
As soon as I developed and tested my new and better investing system, I began deploying it for my money and my family’s money. I invest every dollar of my own money by following the Market Signals system. I am not aware of another approach that provides market beating returns with safety and protection in bear markets.
I have been using it since 2020 and first benefitted by using it during the Covid crash. The Covid crash was almost too easy a test for my system. It was like cheating. The market dropped by 34% in a straight line over about one month. It then went on to rebound very quickly and also in a straight line.
The graph below shows where my system sold out of the stock market and where it bought back in. In a bear market, my system ends up selling high and buying low – the opposite order of the traditional buy low and sell high mantra. But it works just the same, only in reverse order. Our system actually makes a profit in bear markets for this reason.
By the time that the S&P 500 returned back to even six months later, my system was actually showing a gain of 28%. Market Signals gained 40% in 2020 compared to the S&P 500 which gained 16% for the full year. We were only invested in the S&P 500 so the extra gains (24%) were all generated by Market Signals trades during the bear market collapse and recovery.
As I mentioned earlier, 2020 was unusually easy for my Market Signals system. Not all bear markets are this straightforward or quick. But they all follow a similar pattern of rapid declines, and gradual but steady recoveries.
THE CURRENT SITUATION IN 2025
The Market Signals system had me sell all of my stock investments in early March and I have been sitting with my funds parked in a Money Market fund since then. All of my customers received the exact same instructions. We are all earning 4% while we watch the market decline.
Earning 4% is well below the Market Signal’s long-term goal of 13% per year, but it is much better than losing 20%. I can also sleep well at night knowing my life savings are protected in this crazy time. I believe my Market Signals customers have the same peace of mind that I do.
I hope they also feel good about the 45% percent gains that Market Signals generated over the previous two years (2023 and 2024). Market signals was pretty much fully invested in the S&P 500 in 2023 and 2024. We can be comfortable being 100% invested in the best stock market index funds BECAUSE we have protection built in with Market Signals. Without having this downside protection it would not make sense to be 100% invested in the stock market.
With five years of actual trading results and 100 years’ worth of back testing, I have proven that you can “have your cake and eat it too” with investing. The industry would tell you otherwise but consider the source.
The industry would say (and does say) that we are “Timing the Market” and that nobody can time the market. We are not timing the market. We agree that nobody can time the market. We don’t get out at the exact top or get back in at the exact bottom. See the Covid Crash graph. We are not perfect. But in a bear market we just need to get out before the worst of the decline occurs and get back in before the rebound has gone too far.
It is not rocket-science although the math we use does look like something used by NASA.
Using industry terms, what we are doing is called Tactical Asset Allocation. Tactical Asset Allocation is commonly used in the industry. We just do it differently. TAA occurs when stock exposure is increased or decreased based on market conditions. Or when money is shifted from large cap stocks to small cap stocks. For example, this year people have been moving money out of the US stock market and into the European market based on regulatory changes in the US.
The difference between the way we use TAA and others use TAA is that we use a series of computer algorithms to make the changes. Our computer algorithms were developed using actual stock market data for the last 100 years. The industry uses TAA when they “expect” the performance of individual market segments to change. They use predictions. And their predictions have not been back tested or tested in any way.
Projections and predictions in the financial markets are wrong most of the time. Even if they are correct, most people get the timing wrong. Industry professionals will use a fancy analysis and fancy logic to create faith in their assumptions.
I believe in data and not assumptions. This stuff is too hard to predict.
YOUR OPTIONS
You should not sell your stocks unless you have a disciplined and proven approach to get back into the stock market when it rebounds. You can’t do this based on emotions or gut instinct. You should stay the course if you don’t have a system like Market Signals to help you get back in.
My system works because it is quantitative and disciplined and because it has been tested extensively. Flying by the seat of your pants doesn't work with investing.
I used to make these moves emotionally or based on instinct and Buy & Hold beats undisciplined ways to get in and out of the market. Reacting emotionally is worse than Buy & Hold as painful as Buy & Hold can be.
Your other option is to sign up for our Market Signals newsletter. It only costs $39.95 per month with no commitment or obligation. You can cancel at any time and for any reason.
We have customers who have avoided losing 10% of their life savings in the last month. At only a cost of $39.95 a month, that is a pretty good deal. You can sign up now and learn more by clicking here.
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.
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