1974 PART DEUX?
ISSUE # 76
I hope that this note finds you doing well!
Since hitting all-time highs on the first trading day of the year, major indexes have been in a steady downtrend and made fresh one-year lows last week. This is the worst start to a year since 1932… The S&P 500 is within breathing distance of a 20% decline, a common bear-market threshold. The Nasdaq is already down 24.5% YTD.
To add insult to injury, both stocks and bonds are moving lower in tandem. This is a particularly difficult environment for pensions and other traditional 60/40 investors who in the past have been able to count on strong returns from fixed income when equity markets declined, but that is not the case today.
To say that we are in a tricky market would be an understatement!
However, looking at market history, today looks an awful lot like the 1973-74 Bear Market when the S&P 500 declined 43% from peak to valley, see the chart below.
A description from that time period from the Capital Group’s 1974 Annual Report, “The problems that have depressed the market are well known: double-digit inflation, a deepening recession, international monetary uncertainties and the explosive situation in the Middle East. These have all contributed to the biggest problem — a general erosion of confidence”.
That sounds an awful lot like today. Granted, we are not in a recession, but substitute Ukraine for the Middle East and you have 3 out of the 4; not to mention the COVID pandemic and the chaos / disruption it has caused in global supply chains.
Taking all of the above into account, we should note that every decade we have seen declines approaching 20% (Red), as seen in the graphic below ( Courtesy of FactSet). We have also seen significant bounces (Blue) in the following 6 months post market bottom.
So having just attended the Annual Berkshire Hathaway meeting in Omaha, I can’t help but think that it is time to put together a shopping list of all of the companies that I would like to purchase at a deep discount. It is hard to say whether the market will be down 15%, 30% or 45%, but when Mr. Market gets emotional and wants to sell at a discount you want to be ready to oblige.
Below is a picture of Warren (91) and Charlie (98) eating Mrs. See’s Peanut Brittle and drinking Coca Cola as they discuss the outlook for their wide ranging conglomerate. Hat tip to the Absher brothers for making this a great trip and helping me check another one off the bucket list!
The graphic below caught my eye, as even the legendary Tiger Cubs are having a very difficult time in this market with only 2 of 42 names in the black on a YTD basis.
GPS: The ‘Weaponization’ of the US Dollar: Fareed Zakaria gives his take on how the unprecedented sanctions on Russia are driving other countries to find ways to reduce their vulnerability to America's financial reach. I wrote about this in prior issues of MacroCrunch and I think this video is well worth your time.
Charlie Munger on Bitcoin: Charlie talks about Bitcoin and says that he believes it will go to zero and that it is a threat to the US Dollar’s status as a reserve currency. This is a well articulated point of view from the perspective of the establishment and is worth listening too.
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