“I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.”
Jimmy Dean, American Country Music Singer

Today Donald J. Trump was sworn in as the 45th President of the United States.  President Trump steps to center stage.  Bring us jobs, bring us tax reform and bring us a grand fiscal infrastructure spend.  That would be positive.

Trump’s speech today hit hard on the subject of protectionism. “We are going to follow two simple rules, buy American and hire American.”  He was also direct in saying, “I’m giving you back your government.”  It’s broken.  Let’s hope that happens.

Tax cuts and the repatriation of $2 trillion sitting on the offshore books of U.S. corporations are in the economic plus column.  Thumbs up too on deregulation and fiscal infrastructure spend.  Trade wars and protectionism go in the negative column.  As former Dallas Fed President Richard Fisher advised today on CNBC, “Be very careful on these issues of protectionism.  It could lead to a global depression.”

There are reasons for hope and reasons for concern.  There will be disruption and that I believe may be a good thing.  We’ll soon find out exactly what we are going to get.

Today, let’s take a look at the investment landscape through the lens of risk and reward.  To that end, you’ll find two great charts immediately below.

Return and Risk.  Following are two charts that paint the picture.

1. Return Potential – P/E is calculated by smoothing 10-year earnings.  Monthly P/Es (1881 to 12-31-16) are then sorted into five quintiles, lowest P/E to highest P/E (as you read the chart left to right).  A high P/E means that the market is expensively priced.  The blue bars then show the subsequent 10-year average annualized real total returns that were achieved sorted by quintile.  Note the number at the top of each blue bar.  That’s the average subsequent return in each valuation quintile.  See the red “We are here” projecting 2.2% annualized real returns over the next 10 years.  Past history is no guarantee to what the next 10 years will look like, but I wouldn’t stray too far from that bet. I think it is best to play defense and be in a position to play offense when we get to the “We’d be better off here.”


Source: Ned Davis Research

2.  Risk – Show this chart to your client. It shows the corrections and the length of days the corrections lasted.  Circled in blue are the corrections by percent that occurred in the decade between 2000 and 2010 (left-hand side “Loss %”).  For example, the 2001 correction was -30% and lasted 435 days.  The 2002 correction took the market down another -32% and lasted about 140 days.  Collectively, that compounded to about -50%.  The 2009 correction was -55% and lasted about 355 days.

Also, take a look at the corrections in the 1980s (red circles) and the 1990s (light blue circles).


Source: Ned Davis Research

Note that the mean correction for a cyclical bear market that exists within a larger secular bull market cycle is a -21.8% loss that took 211 days.  Note too that the mean correction for a cyclical bear within a secular bear market cycle is a loss of -36.9% that took 371 days.  For what it’s worth, I believe we sit in a secular bull market cycle.

As you may know by now, I’m a big Ned Davis Research fan.  I’ve been a subscriber and happy client since the mid 1990’s.  They kindly let me share certain charts with you, but I story them in a way to share with you how I’ve been using many of the charts for many years.  I love the data and I think NDR is one of the best independent research shops in the business.

If you’d like to learn more about their subscription services, contact Dan DortonaPlease know I don’t get paid a penny from NDR nor a reduction in my research fee.  Just a happy client.

My friend, John Mauldin, wrote many years ago that he expects three recessions before the deck is reset.  We’ve had the first two.  My point is to stay vigilant as the largest declines tend to occur from points of extreme overvaluation, which is where we are today.  You can find a detailed summary of various assessments of most recent valuation measurements here.

My other point is that a better opportunity awaits.  Stay patient and be prepared to act when we get to the “We’d be better off here” valuation area (quintiles 1, 2 and 3 in chart 1 above).

Active money management is not dead.  The herding into traditional buy-and-hold equity market investing today is in full bloom.  I believe it will prove no different than the money that raced into tech in the late 1990s or housing (and equities) in 2007/08.

Sometime over the next several years, we’ll have a recession.  They happen.  They’re normal.  They’re healthy.  Recessions have occurred on average about once every five years or so since World War II.

I will continue to share my favorite recession probability charts with you in this piece and in Trade Signals from time to time -especially when the risk is rising.  As I shared with you in recession charts last week, there is currently no sign of recession.  Data dependent, as they say.

Grab a coffee and click through below.  You’ll find a link to a Bloomberg video interview that includes Ray Dalio, Christine Lagarde and Larry Summers.

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Dalio offered, “Populism scares me.  I want to be loud and clear — populism scares me.  It is the extremes.”  The video interview is about 50 minutes long.  It is worth the time.  Amen, brother Ray.  Be prepared to adjust your sails to reach your destination.

Lastly, if you are going to attend the Inside ETFs Conference in Florida, please tap me on the shoulder and say hello.

? If you are not signed up to receive my weekly On My Radar e-newsletter, you can subscribe here. ?

 Included in this week’s On My Radar:

  • Ray Dalio on Populism — The world today looks very much the way it did in the 1930s and Ray Dalio doesn’t like it one bit
  • A Look at Volatility (For Quant Geeks Like Me)
  • Trade Signals – Flat Tape Related to Extreme Optimism (S/T Bearish for Equities), Zweig Remains in Sell, Equity Trend Bullish (published 01-18-2017)

Ray Dalio on Populism — The world today looks very much the way it did in the 1930s and Ray Dalio doesn’t like it one bit

International Monetary Fund Managing Director Christine Lagarde, Italian Finance Minister Pier Carlo Padoan and Founder, Chairman and Co-CIO of Bridgewater Associates, Ray Dalio, discuss what’s needed to restore growth in the middle class and confidence in the future.


Jump forward to the eight minute mark for Ray’s beginning comments.  He likens today to the 1930s.  Concerning is the wealth gap

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