Palumbo Pulse May 1st, 2023: Going Nowhere, Fast

Many investors tend to get lost in the day-to-day ups and downs of the market and are often spooked or too excited about single days. Yes, there are, occasionally, single days that are important, but they are few and far between. What matters is how all those ups and downs add up.

Stocks, that is, fractional ownership of companies, are the primary driver of wealth creation over time, but the stock market delivers that wealth sporadically. Over the last 100 years there have been several periods where the stock market has been stuck on a hamster wheel for extended periods. Today, several pundits are expecting a similar period in years to come. Stanley Druckenmiller, who along with George Soros, broke Bank of England creating a billion dollar gain back in 1992, is one of those. Druckenmiller has one of the more outstanding and astounding track records in the investing world, so many, including us, pay attention when takes a strong position. (See ‘What We’re Reading’, below.)

Using monthly closing data for the S&P 500, by far the longest period of ‘doing nothing’ was from 1929 to 1954. The S&P index closed at 31.30 in September 1929 and didn’t close a month above that level again until September 1954! That’s an even 25 years on the hamster wheel!

Admittedly, that is an extreme example, but there are other periods in the modern era that have frustrated investors, which we show below.

From October 1973 to January 1980, more than 6 years, the S&P 500 went nowhere.

The same is true for August 2000 through May 2007, and October 2007 through March 2013. Those last two are so close together, another way to look at it is that the S&P had just barely returned to the 1,480 level in January of 2013, a level that was first breached in August of 2000! That’s more than 12 years of nothing.

The reason we look back at this data is that it can be easy to dismiss Druckenmiller’s comments as sounding unreasonable and unlikely. As you can see, the reality is that such periods happen with some regularity and we may be in one of those periods right now. The S&P 500 is back where it was almost exactly 2 years ago in April 2021. The Nasdaq Composite index is back where it was in November 2020, over 2 years ago. It’s important to understand that we have been going nowhere fast for 2+ years already!

What Does This Mean for the Investing Process??

As long as this malaise continues, it will be hard to make money with index funds. By definition, these funds follow the index! The implication is that stock selection is once again important, as it is the only way that provides the potential to generate positive returns in a market that remains effectively flat. Until this situation changes, it also argues for 401ks and 403bs to be invested in actively managed stock funds (as long there are good options), as opposed to indexes. And finally, in a bit of self-promotion, think about converting old 401ks into IRA’s, which do not limit you to a short menu of investment options.

?

What We’re Reading

Druckenmiller takes aim at dollar in sole conviction trade

Fire Sale: $300 Million San Francisco Office Tower, Mostly Empty. Open to Offers.

Republicans Pass Debt-Ceiling Bill Aiming to Spark Talks With Biden

Banking Problems May Be Tip of Debt Iceberg

Argentina to pay for Chinese imports in yuan rather than dollars

So this is what the bottom of the freight market feels like?