A Word from Jeff – Is the Bear Market Upon Us?

In a word no. I really don’t think so.

While I appreciate that the recent volatility has concerned many investors, I think it really just represents a return to more normal market behavior. As humans, we are pretty well hardwired to project the recent past into the future, and expect more of the same. Looking at the blue line in the chart below, the S&P 500 has pretty much gone smoothly up since early 2016 until it hit the wall as we saw in early 2018. Before I get into my forecasts of what to expect going forward, it’s important to reflect a bit on this normal volatility. What we have seen so far in 2018 is fairly typical, and pretty similar to the period in mid-2015 to early 2016 below. Investors must remember that volatility – swings, sometimes violent, in value – is the price of stock market success. Given a long enough time frame a well-diversified stock portfolio is virtually assured to be quite profitable based on history. The price of such success is the scary bumps. As one pundit wisely says, “the biggest risk in the stock market is to not be scared out of them.

I remind you of this because I think this volatility is far from over for 2018. As many of you know, I have felt that US stock valuations have been lofty for a while, and I have been expecting a substantial correction for some time. I think it has finally arrived, and is not yet over. It is worthwhile to ponder the term “correction” a bit. Investopedia defines this as “…generally temporary price declines interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either.” But the “correction” is of pricing – a market recognition that prices have got out of whack to underlying value, and need to be adjusted to reflect economic reality. So far in 2018, the US market has already endured an “official” correction, a drop of at least 10% from peak values. The “official” definition of a bear market, by the way, is a 20% or greater drop from the peak. But the term bear market strongly implies a protracted down market driven by recession or other very negative economic factors, so while I think the 2018 correction may yet be more severe, I do not think any upcoming sharp drops signal a bear market. I firmly believe the US bull market will continue for some time, and that the non-US bull market has a very long time to go.

Still, current conditions underscore the need for investor caution going forward. In the long run-up from the bottom in 2009, it seems like nearly everything has gone up, individual stock picking has not mattered, and “passive” index investing was the best way to go. Because of how the brain works, “was to go” becomes “is to go”, but going that way can be very dangerous now. The recent sharp reversals of arguably greatly overvalued tech stocks has been a stark reminder that this may not be so, and that informed care in picking quality companies trading at attractive prices may in the end be a better way to go than simply buying the entire market, regardless of the quality it may contain. For more on this, see “Is the Tide Going Out on Those Naked Index-Investor Swimmers?” below.

So while Camarda believes the US bull market to still have legs, successful investors will need to be more choosy going forward, and to look to buy good quality relatively cheap in order to succeed in what we see as generally overvalued conditions. The recent trade-war-posturing between Mr. Trump and the rest of the world – er, China – has injected a more than healthy dose of fear into a giddy market overinflated by heedless greed. While Camarda believes Trump is playing a shrewd game of economic chess that will ultimately improve fairness and prosperity to America’s global trade, the uncertainty is creating some nice buying opportunities in carefully-selected US stocks.

Those of you that have followed me for a while know that I’ve been expecting a hot gush of air to come squirting out of the overvalued stock market balloon for a while, and I think we are here, at least in the beginning stages. This is not a time for fear, but for understanding, so that you make decisions that are lined up with your financial interests. As many of you know, Camarda believes that Buffett-style value investing – buying quality cheap – is the smartest way to invest. Those of you in Camarda portfolios are invested with this in mind, and we believe you are well-positioned for the markets ahead. Those who are not may want to deeply consider this, and if they’ve recently gotten a taste of what Warren Buffett was talking about when he said “you only find out who is swimming naked when the tide goes out.” What he meant by this, of course, is that a raging bull market, where caution’s flown to the wind, hides a lot of risks, and sins like buying iffy stocks for crazy prices. It is easy to look like a genius in a bull market. When the music stops – when the tide goes out – it becomes a lot more evident that it really matters what you buy, and what you pay. Camarda thinks this may become the bane of many a passive investor, who will not understand why the markets may become unforgiving, and why indexes may flounder while some stocks may thrive.

Finally, given the forecast for bumpy skies ahead, it is important to remember that over the long term – which probably means for the rest of your life – stocks are probably the best asset you can own that does not require active work like running real estate or a business. This is so important you should burn it into your brain so you are strong when the inevitable bone-jarring market drops happen. You have to remember to not be scared out of the market! The following facts offer some comfort, and cause for courage. If you had invested $1 right before the 1929 crash and put it in cash, after inflation (but before taxes) it would have “grown” to about $8 as of 2016. In bond, about $121. But in stocks, you would have about $6,022! When you add value stocks trying to buy quality cheap as Camarda does – the number really goes off the chart. But the really important point I want to leave you with, and maybe fortify you with against the chop ahead, is that if you can make yourself be patient, for most investors stocks really are the only smart game in town. From a long term perspective, stocks are remarkably predictable and superior. Just don’t outsmart yourself and get scared out of them.

Also remember that in the long run, value investing – the sort Camarda espouses where we look to buy good stocks on sale – tends to really outperform, beating growth stocks, for instance, by close to 50% per year, and long term government bonds by something like 160% per year, as you can see from the table below from one of my favorite newsletters. For reasons explored in previous newsletters, Camarda firmly believes value will outperform by even greater margins in the years and decades ahead.




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