Global Courant
No, I didn’t predict the 14% return over six months for stocks, and neither did anyone else. No one! Even the raging bulls only whispered 10%, and that was for the whole year. I always offer 10% estimates for future year returns. It’s been a fairly reliable figure year in and year out, and best of all, hardly anyone remembers any of these January predictions in the following December. But I wasn’t betting on 10% for this year. I suspected flat. Even. And I thought I was optimistic. Recession MIA Instead of giving my litany of dour details that made me feel so down, let’s find out what I and others have missed. The answer is that I’m still not sure. My stern details were true and remain true. It’s the guests we’re tired of that won’t leave, so we just do our best to ignore them. This damn recession should be happening to us, but it isn’t. I asked former Richmond Federal Reserve president Jeffrey Lacker why we hadn’t had a recession, and he said, “Because the Fed didn’t raise rates far enough.” But the absence of a recession alone is not a reason for the rising stock market. Frankly, I don’t know what it is. Throughout 2022, brilliant strategists explained that higher interest rates were bad for technology companies, but despite higher rates, a handful of technology stocks accounted for most of this year’s gains. The seven largest companies in the S&P 500, all technology companies, are up an average of 86% so far! Meanwhile, the other 493 companies in the S&P 500 in total barely moved at all this year. Solid, blue chip, defensive stocks outside the technology sector have largely languished. Why ignore these perfectly good companies, and why the tech pile-up? It wasn’t that money had nowhere else to go. It had 5% Treasury bills and suddenly tasty money market yields. Looking at your 7% or 8% return over the first six months, do you chastise yourself or your manager or scream at the top of your lungs when you’re alone in your car with no other cars around? see you screaming like crazy? (Maybe I’ve done that once or twice. NB: It feels great!) The answer is that if your investment horizon was the six months ending June 30, if you’re not up 14%, you’ve really screwed up. But if your horizon is longer term, you’ll have to wait and see. Anomalous First Half Over many years, stock market returns have experienced many periods of unexplained volatility that transition into a return to average. I suspect that this period will be seen as aberrational in retrospect. In addition, I believe that the stocks that did not participate in this stunning rally will have their best days. As Warren Buffet likes to remind us, the market is a voting machine in the short run, while it is a weighing machine in the long run. Time will tell, but we find a lot of extraordinary companies that are not up 90% year-to-date. Don’t get me wrong, I hate that I wasn’t up 14%, but I couldn’t have tolerated the necessary risk, and I didn’t have to take those risks. In fact, clients expect us to avoid unnecessary risks and keep them safe. More than ever, I believe in owning those individual companies that are well managed, have fortress-like balance sheets and grow their bottom line. Good investors don’t change discipline to meet the market’s fads. Good investors stick to proven disciplines during the fads so they can reap hard-won lessons and solid long-term returns.
DNY59| iStock| Getty Images
No, I didn’t predict the 14% return over six months for stocks, and neither did anyone else. No one!
Even the raging bulls only whispered 10%, and that was for the whole year. I always offer 10% estimates for future year returns. It’s been a fairly reliable figure year in and year out, and best of all, hardly anyone remembers any of these January predictions in the following December. But I wasn’t betting on 10% for this year. I suspected flat. Even. And I thought I was optimistic.
Recession MIA
Instead of offering up my litany of dour details that made me feel so down, let’s find out what I and others have been missing. The answer is that I’m still not sure. My stern details were true and remain true. It’s the guests we’re tired of that won’t leave, so we just do our best to ignore them.
This damn recession should be happening to us, but it isn’t. I asked former Richmond Federal Reserve president Jeffrey Lacker why we hadn’t had a recession, and he said, “Because the Fed didn’t raise rates far enough.”
But the absence of a recession alone is not a reason for the rising stock market. Frankly, I don’t know what it is.
Throughout 2022, brilliant strategists explained that higher interest rates were bad for technology companies, but despite higher rates, a handful of technology stocks accounted for most of this year’s gains.
The seven largest companies in the S&P 500, all technology companies, are up an average of 86% so far! Meanwhile, the other 493 companies in the S&P 500 in total barely moved at all this year. Solid, blue chip, defensive stocks outside the technology sector have largely languished. Why ignore these perfectly good companies, and why the tech pile-up? It wasn’t that money had nowhere else to go. It had 5% Treasury bills and suddenly tasty money market yields.
Looking at your 7% or 8% return over the first six months, do you chastise yourself or your manager or scream at the top of your lungs when you’re alone in your car with no other cars around? see you screaming like crazy? (Maybe I’ve done that once or twice. NB: it feels great!)
The answer is that if your investment horizon was the six months ending June 30, you really messed up if you weren’t up 14%. But if your horizon is longer term, you’ll have to wait and see.
Aberrational first half
For many years, stock market returns have many periods of unexplained volatility that transition into returns to the mean. I suspect that this period will be seen as aberrational in retrospect.
In addition, I believe that the stocks that did not participate in this stunning rally will have their best days. As Warren Buffet likes to remind us, the market is a voting machine in the short run, while it is a weighing machine in the long run. Time will tell, but we find a lot of extraordinary companies that are not up 90% year-to-date.
Don’t get me wrong, I hate that I wasn’t up 14%, but I couldn’t have tolerated the necessary risk, and I didn’t have to take those risks. In fact, clients expect us to avoid unnecessary risks and keep them safe.
More than ever, I believe in owning those individual companies that are well managed, have fortress-like balance sheets and grow their bottom line. Good investors don’t change discipline to meet the market’s fads. Good investors stick to proven disciplines during the fads so they can reap hard-won lessons and solid long-term returns.
S&P 500 up 14% in 2023. Exactly as I predicted last December!
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