The market survived Phase One of the Tariff wars intact. After the big decline in stock prices in March and April, stock prices have climbed all the way back to even for the year. As of Friday June 13th, the S&P 500 was up 1.9% for the year and the Nasdaq was up 0.6%.
In the chart below you can see the extreme price volatility in April and the steady move higher over the last six weeks.
Unfortunately, the period of shifting tariff policies is not over although the stock market thinks it is over. The various 90-day pauses are not up yet and there have been no major trade deals completed. The stock market believes that the Administration will back off of their most extreme tariff positions but it remains to be seen.
Economic news has been mostly positive over the last month.
Inflation reports have been positive although the impact of the tariffs has not shown up in the data yet. July and August inflation readings will be the first indications of the impact of tariffs on inflation. The Fed is waiting on those readings to make their decisions on interest rates.
Unemployment claims have been rising gradually but the overall numbers are still at levels that indicate a healthy job market.
Corporate profit reports for the First Quarter have been positive which has contributed to the stock market rebound in May and June.
The Israel-Iran conflict caused a slight pullback in stock prices at the end of last week. Hopefully, cooler heads will prevail, and the conflict can be contained.
It was a wild ride to nowhere in March, April and May. Discipline and patience paid off over the last two months. Following a disciplined system in times of volatility always produces better results than letting emotions drive your investing decisions.
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.
When you invest in the stock market through an index fund representing the S&P 500, you can be extremely confident that the value of that investment will grow significantly in the long term. You can be much more confident in the value of your stock market investment increasing than you can be in the value of commodities or real estate increasing in the long term. You can be much more confident in the value of the S&P 500 increasing than you can be of the value of any specific individual stock. But why is that true?
When we refer to the “stock market” in this article, we are referring to the S&P 500 – the 500 largest and best companies in the world. We are not referring to individual stocks or specific mutual funds or sector funds. The S&P 500 is the best representation of the broad stock market because of its size and its diversity.
The first factor to consider is the history of asset prices. The stock market has delivered higher investment gains than all other asset classes over long periods of time (50 years, etc.). The S&P 500 has returned between 9% and 10% per year over the last 50 years when you include dividends. Bond yields have averaged around 4% and 6% per year for the last several decades. No commodity has consistently returned anywhere near 10% per year over the past several decades. Gold has shot up recently but it had gone nowhere for the prior twenty years.
But as we are often told, past performance is no guarantee of future results, right? How can we be so sure of the gains from the stock market in the future? What do stocks have going for them compared to the other asset classes?
Our entire political and socio-economic system is designed for the companies in the stock market to succeed. Let’s look at the incentives that help to propel the stock market higher:
All 500 companies in the S&P index have tremendous incentives to grow. The management, the board members, the shareholders, and the employees have huge incentives in place for those companies to be successful.
Local, state, and national governments are incentivized for those companies to grow. Tax revenues and job opportunities benefit all government entities.
The general population (voters) wants good paying jobs in their communities.
Investment capital flows to growing and successful companies.
While the same incentives are there for individual companies to succeed, the same argument doesn’t hold up when we are talking about the stocks of individual companies. Diversification allows us to be extremely confident in the S&P 500. In any year or any time period, we see a mix of company performance and stock performance within the 500 companies in the S&P index. The growth of the market in any period is typically driven by only about 25% of the companies in the index. That means that 75% of the companies in the market typically underperform the market average. And in different time periods, we see different companies driving the growth. Looking out 30 years or more, history suggests that half the companies in the S&P 500 will not be around. No one can be certain about which companies will survive and which one will not.
The S&P 500 contains companies from all the biggest and most important sectors of our economy. The index has a nice mix of financial companies, industrial companies, technology companies, consumer goods companies, health care companies, pharmaceutical companies, etc. When one major sector struggles there is typically another sector that performs very well. When you own an index fund representing the S&P 500, you get both individual company diversification and you get industry sector diversification.
The same incentives that drive the stock market are not in place for bonds, or commodities, or real estate. Most people would prefer that the price of commodities and real estate remain constant or even go down. Consumers and governments don’t like price increases. Most people would prefer that interest rates on bonds were lower rather than higher. Higher rates limit borrowing which inhibits growth in the economy. There are plenty of people who benefit when prices increase but they are in the minority.
The market seems to be very comfortable with bond rates around 4% over the long term. Investors are comfortable with this return rate for the level of risk associated with bonds. Since there is much higher risk associated with stock investments, investors seem to be comfortable with a two-to-one rate (stock returns of 9% to 10% vs. bond returns of 4% to 5%). If stock returns get too close to bond returns, there is no incentive to invest in stocks.
The other factor to consider is innovation. It is innovation and productivity that drive the increase in value in companies and, therefore, the stock market. We have created a highly innovative and productive economy and I see no reason for that to slow down in the future. One could argue that innovation is accelerating rather than slowing down.
The only thing that could get in the way of the 9% to 10% continued annual growth of the stock market is a collapse of our political system. Given the events of the last five years, one can’t totally rule that out. But even in the most extreme situation of political upheaval, the same incentives for market growth will still be in place. There is way too much money at stake. Major political disruption would have a big, short-term effect on the stock market but after a period of time, the stock market will continue growing.
Our Beyond Buy & Hold system protects investors from major, short-term collapses regardless of the reason. Everyone needs an investing strategy like our Beyond Buy & Hold system to protect against the inevitable, short-term disruptions to the stock market. People need a better approach than simply “Riding it Out”.
The best investment strategy for long term growth is built upon investments in index funds representing the S&P 500 and the Nasdaq. Our entire political and economic system is designed to support the healthy growth of the stock market. You can be extremely confident in achieving long-term returns 8% to 9% per year even accounting for short-term bear market collapse like the one we are going through right now. Combining a market index investing strategy with a risk-based trading strategy like our Beyond Buy & Hold system will get you even higher returns.
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 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.
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