David's Weekly - Nov 17, 2023
David Crotin, MASc, CIM, QAFP
Working with business owners, executives and professionals to provide tax, investment and financial planning strategies to meet their needs and goals.
Plan - Don't Predict
In this week's letter
Investors will be in the red at least once every year, and that's part of the game
When helping clients recognize the nature of the beast that is the stock market, we always share the below facts which can ease the struggle of staying invested through the volatility. When it comes to market behaviour over the long term, it's better to see through the chop and just allow the market to take you where you need to go.
A new year, a new dip
Here are a few facts to keep in mind when riding out the ups and downs. Since 1928, the S&P500, the world's premier large-cap index, has had at least one 10% dip per year and at least 3 dips of 5% per year. Roughly every 3-4 years a bear market hits that results in a fall of more than 20%. In general. this means that it is a reasonable expectation for your diversified equity portfolio to be underwater at least once a year!
The good news - the longer you invest, the better your probability of positive returns
Despite the downside seen every year, the S&P500 has been positive 75% of the time over the same period. As that period extends out to more than 5 years, the chances of being in the black are nearly 100%. This is exactly why its important to remain invested.
Probability of positive returns as holding period increases - S&P500
The parallels between investing and conflict - Mideast Update
If there's a story as old as time, it's the impact of fear and greed on the markets. There is not an investor out there who has not been drawn in by the siren call of overly inflated fad stocks, often referred to as FOMO, or been left deflated at the side of the road after a panic sale of securities that have gone irrationally from darlings to dogs.
By the same token, most of us are strongly impacted by the stories of the current conflict in the middle east, driving and even justifying abhorrent behaviour that would seem unthinkable during calmer periods. Keeping that in mind, we'll offer a dispassionate quick update on where things might go.
Although the market impact on the usual suspects - oil, gold, USD, remains minimal, that could all change rapidly. However, we still believe that despite the unbridgeable ideological divide between the primary power players in the Middle East, namely the US and Iran, pragmatism remains the order of the day.
In particular, Iran has declared publicly that it will not intervene directly in the conflict and instead will add pressure on the U.S. through the use of its Yemeni, Iraqi, and Lebanese proxies to keep the flames high, but not out of control. Our friends at ISW share this chart of where this "pressure" is being applied.
Attacks against US Bases in the Middle East as of Nov 16, 2023
The Americans maintain a substantial military footprint, greatly enhanced over the last few weeks, to deter a full regional war. To date, that deterrence has been effective.
On the ground in Gaza, we expect a lower-intensity conflict to replace the previous week's highly intense Israeli campaign and would expect this conflict to turn into a longer, drawn-out counter-insurgency, much like what we saw when ISIS was eliminated. The latter required providing a better future for those who were drawn in for ideological and financial reasons to fight for groups like Al Qaeda.
What's Next?
Changing the trajectory of history in this very long conflict will be tough. Although more and more peace treaties have been signed by Israel and "moderate" Arab states, the completion of that task which would include a normalization with Saudia Arabia, is still not a guarantee. The key is to have a plan for post-conflict and there isn't yet one in place.
Putting on the chartist's hat to predict upcoming returns
We've spilled a lot of ink writing about the follies and value of technical analysis. The randomness of charting is reflected in the fact that all of the patterns such as head and shoulders, breakouts, consolidations, flags, etc. can be generated, of course unpredictably, using the flip of a coin.
This is not an investing technique
However, there is some value in charts as they are great at giving us an idea of where we have come from and where we might go next. So, with that in mind, let's have a look at where things might go over the next year.
The USUAL 3-4 Year Liquidity-Driven Cycle
Sometimes it's tough to see the forest from the trees. The analogy we like to use comes from motorsport technique. If you are on a track, it is easy to start staring down the hood of the car and watch the asphalt race under the car at 100 MPH. This translates into too much steering input, fatigue, and slow times. Better to keep the eyes above the middle of the windshield and at the horizon. That yields steady, accurate, and less frequent inputs and faster times.
For the highest performance - in your portfolio and on the track
The liquidity part
Ok, so when it comes to the market, it's worthwhile to keep your eyes on the horizon as well. Although market cycles aren't exactly 3-4 years, it's a reasonable assumption to use. As we know, when central banks add liquidity, the growth outlook improves for the economy and markets. The market cycles themselves are, therefore, largely driven by Fed policy. As David Rosenberg typically says,
"the bull market will continue until the Fed puts a bullet in its head."
S&P 500 Cycles - Liquidity drives economic and earnings growth
In the above, those 4-year cycles are noted in yellow. With the market trading in a broad range between 3500 and 4800 and the end of the Fed hiking cycle looking more and more likely, we are set up constructively - i.e. for a push higher.
Our current view is not a prediction of course, as getting that right is nigh on impossible. This common sentiment, most famously quoted from Yogi Berra - and we paraphrase here - goes something like:
"making predictions is hard, especially about the future."
However, investment is only part of the picture of a full wealth management program. If you're looking for guidance on your own investments or have more questions than answers about any of the following areas where we help our clients, please get in touch - [email protected] .
And with that, we'll wrap as always with this week's global insight. Enjoy
In this week's issue:?
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