Escape Velocity
Selling in May and going away probably wasn’t the best strategy, as the Dow, NASDAQ and S&P500 each ended the month with gains. As of Friday’s close, all of these indices are up 14%, or more, for the year. I think that, instead of basing a strategy on adages, staying invested has proven to be a much better approach over time.
As of Friday’s close, year-to-date, the Dow had gained 15.4%, the NASDAQ was up 14.4% and the S&P was higher by 14.3%. (1) Trying to time the market, based on whatever strategy, has proven to be extremely difficult to do with any consistency. Establishing and sticking with an asset allocation plan specific to your needs and situation seems to be a more appropriate method of managing your investments.
What, exactly, are we escaping from?
I got the idea for the title of this letter from something Bob Doll, Chief Equities Strategist at Nuveen Asset Management, wrote this week.(2) He commented that, “We believe investors are anxious about an end to Fed assistance because they lack economic confidence. Once the world economy reaches a level of escape velocity, monetary stimulus can be taken away and the economy can take over as the driver of asset prices.”
Imagine the market as a giant rocket of the type that took us to the moon. That load was especially heavy and the resultant gravitational pull tremendous. Reminds me of having to overcome our attitudes of the past five to ten years.
When those massive engines first fired, there was lots of smoke, flame, vibration and noise for what seemed like quite a long time – all with no visible movement. Was something wrong? Was it not going to lift off? This suggests the last few years with the market moving, surrounded by worry and no one seemingly being aware of the move.
Finally, gradually, you could actually see upward movement. Before much longer, as the power continued steadily strong, the drag was overcome and, almost before you knew it, the rocket was out of sight, achieving the velocity necessary to escape what had been holding it back.
It’s my perception that this market/rocket is at the early stages of this last part. It’s my belief that we are, in fact, on the verge of finally escaping from the hangover of these multiple years of collective economic and emotional drag. Here’s the basis for why I say this.
History doesn’t repeat itself, but it rhymes
The above quote from Mark Twain is particularly applicable to the economy and markets. As we know, the markets, economy, seasons, tides – any number of things – are cyclical. While, unlike the last two, we can’t accurately predict the start and end times of the first two, market history shows why the phrase, “this time is different” is such a dangerous one.
From 1966 to about 1982, the Dow spent a lot of time plus or minus of 1000. (Having started in 1973, I had a front row seat to that movie.) This range-bound trading over a long period is termed “base building.” Matter of fact, there have been four such long periods of more than 12 years spent base-building since 1900.(3) What has been significant about them is that, following each of these three prior base-building periods, there were significant, long-lasting, generally upward market movements. I’m going to compare – rhyme, if you will – the 1966 to 1982 period and the one we’re in now, as I see some striking similarities between the two…especially in the transition time from base-building to growth.
For instance, in 1982 and 1983, investors were concerned about slow growth, budget deficits, entitlements and tax reform. It was at this time too that the long cycle of the bond bull market began. No clear-thinking investor had the least inclination to buy stocks then as they “hadn’t done anything” for the last bunch of years. For example, in August, 1982, very few wanted to invest in IBM at $65, Union Pacific at $33 or Consolidated Edison (NYC electric utility) at $18. I selected that time because the market started its ultimately 18 year climb in August, 1982, with about as much” enthusiasm” as we had in March, 2009.
Back then, like now, there was also a definite lack of interest by, and participation of, professional portfolio managers in stock purchases until, at least, 1985 – 1986. Individuals, as they have done lately, also dragged their feet and remained out until about 1987. (A number of them were scared right back out in October of that year when we had our historic one day 22% price markdown.)
Back on 1 April of this year, Jeff Saut, Chief Investment Strategist at Raymond James, wrote about the stages of a bull market.(4) He said,” Following the end of a bear market (aka, base-building phase), with the initial ‘lift off’ move of the beginning of a new bull market, there are cries of, ‘This is just a rally in an ongoing bear market.’” (Sound familiar?) Then, in the next stage, which he calls guarded optimism, “Every rally after a bear market bottom is encased with pessimism/skepticism as represented by comments like, ‘This is the last chance to get out.’” He reminded us that this was all the media could focus on in March, 2009, when the only pundits to get any air time were those who were “trotted out to tell us how bad things were going to get.”
Then, as market participants realize that their worst fears weren’t being realized, we move to “guarded optimism.” As things improve further, we’ll then give way to the next stage – “enthusiasm.” In my opinion – whether we have a correction soon, or not – we’re between these two.
Fuel for our rocket
Let’s look at a few economic reports from this past week that, I believe, help to show you the strength of the economy that will continue to boost the markets.
Energy – According to the Energy Information Association, for the January through April period of this year, petroleum imports (most of which come from Canada and Mexico) represented the lowest percentage of total consumption since 1987. Further, our crude oil inventories rose to their highest levels since records were first kept in 1978. This output boosts industrial production. It also has been a windfall for the railroad industry where weekly car loadings of petroleum and chemical products has soared 41% over the past four years to a record high in mid-May.(5)
Real estate – The overall recovery in home construction means that this sector is likely to be a strong contributor for the foreseeable future. The Case-Shiller home price index of the top 20 top US real estate markets had the biggest 12 month increase since April, 2006, as all 20 cities showed gains for the fifth month in a row. And pending home sales, sales contracts on existing homes, are up 13.9% from a year ago to the best level since April, 2010.
So, both of these sectors provide a significant beneficial ripple effect as a result of their improvement. Cyclical stocks will tend to benefit from this growth. Additionally, there’s a boost to household wealth from the rising home and retirement account values, along with a generally much more optimistic outlook. Consumer sentiment was reported as being at its highest level in six years. And a rising dollar and rising interest rates are both historically consistent with a market that sees a real recovery taking hold.
By the way, for those worried about the Fed tightening, i.e., raising, interest rates, maybe you can dial that down a bit. According to my buddy, Cullen Roche at Pragmatic Capitalist, “since 1954, there have been 11 major Fed tightening cycles (trough to peak Fed Funds Rate). During those cycles, the S&P500 rallied an average of 11%.” The analysts at Deustche Bank seem to share this positive view as they wrote in their Equity House View report that, “Since 2000, rising bond yields have mostly been associated with rising equity markets. Even sharp rises in bond yields have overwhelmingly coincided with positive equity returns (88% of instances).”
Summary
Having been an involved participant during the 1982 – 2000 market cycle, there’s no way I’m suggesting this new one will be completely smooth. We’ll have multiple corrections, anytime from now until this ride gets to the end – whenever that may be. It’s the stock market, after all. From the big picture standpoint, remember that they’re just speed bumps. Don’t let them push you off your course.
I think we’re going to have a great long ride – hope you’ll be coming along…
Cheers!
Mike
509-747-3323
- CNBC, 31 May 2013
- Nuveen Market Comment, 28 May 2013
- Jeff Saut, “Buying Stampede,” 28 May 2013
- Ibid.
- Dr. Ed Yardeni, 29 May 2013
To get an overview of economic conditions, use this link. It’s updated monthly.
http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx
Past performance is not indicative of future returns. Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.
Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
Michael J. Maehl, CWM®
Senior Vice President
Opus 111 Group LLC
400 S. Jefferson, Suite 400
Spokane. WA 99204-3142
509-747-3323 office
509-944-1790 cell
