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Through The Bear Market Looking Glass
There’s not much to like about the state of the equity markets.
The knife is still falling. The Generals have been shot. Wall Street still isn’t expecting an earnings decline. And the Fed is hellbent on destroying your wealth in order to tamp down inflation.
Pretty much every asset class is down except commodities — which most have rolled over in the past 30 days.
And that’s just the equity markets.
It’s no wonder why sentiment continues to be extremely fearful. It’s been this way all year.
Here’s a look at CNN’s Fear & Greed Index two ways:
Overview:
And here’s the timeline view over the past year.
You can see we’ve been in the range of “fear” or “extreme fear” for pretty much all of 2022.
Our guess is you’re as paralyzed as the rest of the market in putting money to work now. That’s normal.
It’s hard for us to envision anything other than what’s in front of us.
But there’s some really compelling data from Miller Value Partners portfolio manager Samantha McLemore.
She points out that after we’ve entered a bear market — down 20% from the previous high — the market averaged mid-teens returns over the next year. And low-teens returns per year over the next 3-5 years.
“On average, the market gains 16% over the next year and 13% annually over the next 3-5 years (including any additional losses).”
The bad news? It’s not straight up from here. In fact, history shows more downside.
“Once the market dropped 20%, there was an average additional downside in the mid-teens percentages. “
Her note points out that the future market returns are positive in every bear market scenario. Including recessions.
The worst returns McLemore noted were during the 2000 tech bubble burst. But even then, returns were flat-to-positive.
“The worst 3- and 5-year returns were after the tech bubble burst in the early 2000’s. The S&P 500 posted returns of (1)%-3% per year over 3-5 years. Note: there’s absolutely no precedent for losing money over the 5 years after entering a bear market, wow!”
History is no representative of what the future beholds. But history does rhyme. And the data shows that sticking your neck out at these levels should present pretty good returns.
But you should expect at least another mid-teens drop from here.
Can you stomach that? Would you be able to sleep well at night if that happened?
If so, then buying at these levels could work out pretty well for you.
After all, the way to generate alpha is to do what everyone else isn’t.
Deutsche Bank shows most asset managers and leveraged funds are the most short on record.
Equity futures positioning for asset managers and leveraged funds is now the **most short** on RECORD -DB
— Gunjan Banerji (@GunjanJS)
1:23 PM • Jul 16, 2022
Which is another positive sign that the markets — over a long enough period from here — should go up.
Bottom line: No one can time the bottom. Most investment legends say the best time to buy is when they feel sick to their stomach. It seems like the majority of people feel sick to their stomach. We’ve heard from several people they won’t even look at their stocks. Meaning it could be a good time to buy. History says as much.
We’ll look back 3-5 years and see if this is another one of those cases. Or if this time is different.
But history is on our side.
Good investing,
Lance
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P.S. Which way are you leaning? Are you buying into the markets? Reply back and tell us!
P.P.S. Want to listen to one of the greatest investors of our generation? Then you should check out the interview with Oaktree Chairman Howard Marks below. His investment memos are must-reads too.