CAMS Weekly View from the Corner – Week ending 7/22/2022
July 25, 2022
Today we offer a contemplative look at the stock market through a large lens without looking at the stock market. Rather, we will look at the citizenry as a collective body relative to how they view the stock market as depicted through their household finances. Collectively, through this lens, they have never loved the stock market as much as they do these days. This elicits a brief historical walk in a narrative sense. Are you old enough to have participated (or young enough to have only read about) the tremendous stock market run of the late 1940’s up through the latter 1960’s? Like all long-running upward markets they develop a theme that emerges which becomes synonymous with the era in market history books. The “Nifty Fifty” back then was a sure way to eternal financial riches whereby owning the identified Nifty Fifty stocks was the no-brainer approach to mindless wealth creation – “look ma no hands!” – inviting the sure to come Minsky moment (hold the thought.) Similarly are you old enough to have participated in the tremendous stock market run of 1982 up through to the new century year 2000? True to form, as the market ran ever higher collective confidence built to madness levels thereby believing the stock market could not go down anymore in light of the “New Economy Era” economically/socially speaking with the advent of the Internet. The no-brainer approach was to merely own Tech stocks and to collectively retire at the age of 25! An endless stream of tech stock wealth generation was assured. (Got Minsky?) Our Current Era Post-Great Recession of 2008/09 the stock market found its footing a couple of years later which began a decade or so of an upward trending stock market that became characterized by the acronym FANNG. Said acronym reduced the 50’s/60’s era of Nifty-Fifty stocks down to a much smaller list of a “Nifty-Five.” This coupled with Indexing – simply buy a stock market index and hold – and again endless streams of wealth generation was assured for as far as the eye could see. Yet again inviting a Minsky moment. Hyman Minsky Mr. Minsky was an Economist famous for the “Minsky moment” which reduced to simplicity offers stability breeds instability and instability breeds stability which leads to a broader “Minsky Cycle.” Pertaining to market cycles, stability (born from the previous instability) encourages risk taking that ultimately feeds on itself creating a collective belief of never-ending upward markets whereby stocks are bid up to extreme valuation levels (as described above) that walks the citizenry right into the next level of instability – think down markets not just for a few months but for a long while. Think true bear market as we have sprinkled about in numerous editions over the previous year. In the above described eras notice the long lapse between them. That is the “true bear market” part of the overall market timeline whereby stocks no longer trend upward but go down, go up, go down (a lot) again so on and so forth with the process leaving no uptrend in sight for years. What is left is a series of mini-up trends followed by longer down trends. All told, the previous collective belief that stocks will be trending endlessly higher as felt in all long running upward markets comes to a halt.
Click For Larger View: https://fred.stlouisfed.org/graph/?g=RzkS
Above is an 80 year history of the percentage of household assets held in stocks. In the chart we have annotated the peak levels of household ownership of stocks (think excitement) for the ending of the various time periods as narrated previously. As depicted, our current period exceeds all others. (Got Minsky?)
When Seemingly No One is Concerned – Be Concerned If everywhere you turn the citizenry/policy makers are concerned of X topic you can relax some into knowing said concerns will address the issue. The much larger issue is when there is a glaring issue and seemingly no one is the least bit concerned in a collective sense. Raise the topic and it elicits no concern. Think runaway U.S. debt – does anyone care at all? We digress. (A future edition.) On a personal note the above 80 year chart speaks to some personal experiences over the previous year-plus relative to interactions with non-market oriented people that all met the same relative descriptions. That is, nearing retirement or embarking on retirement. With the “all-in” mentality that has developed in our current market up cycle whereby “owning the stock market” and “safe retirement account” is viewed as one in the same I felt it perhaps timely to offer a public broadcasting moment if you will. In conversation, posing the discussion topic as to whether they have considered reducing their exposure to the stock market, you know, old school like, where risk exposure was equal to age on the timeline, said topic was a non-topic. Strangely, as a general discussion their retirement money was viewed as safe “….it is in the stock market….” and besides if it were to go down “….it will come back….” These shared views line up exactly with our above chart which lines up perfectly with long running market extremes. The masses are convinced stocks cannot go down for a long period of time outside of a mere blip whereby they will pop right back up. Historical realities of long true bear markets be damned – proceed without concern. For my part, in such conversations, they always left me walking away thinking – got Minsky? For our part we are fully focused on tactically managing assets and are prepared for the ever building potential that we have already begun a long run true bear market. With this, being in safe harbor type investments when the market winds are blowing are fine with us. When a new mini-up trend begins we participate while keeping our psychological flexibility to move back to safe harbor when necessary. Mental flexibility is crucial in true bear markets. Historical Minsky cycles teach us this ad nauseam. I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
Footnote:
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.
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