“This is what our mind should do: It should hide away all the materials by which it has been aided and bring to light only what it has made of them.” Seneca, born in the year 1 BCE.
Some questions answered (plus quarterly portfolio performance) and print function is below:
What is a market cycle? It is the three stages of economic expansion that are followed by a more rapid period of economic deflation, sort of the slow breathing in and the rapid exhaling of what Warren Buffett has named “Mr. Market.” Each stage of the market cycle normally experiences a counter move just before moving on to the next stage.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
[NOTE: The market cycle does not always fit the below template, sometimes it can wildly vary or even skip entire stages or fall back into a prior stage. As with everything else, experience is absolutely necessary especially since the section labeled “A-B-C” occurs twice per decade and it can either be profitable or horrible!]
Where are we in the market cycle? We are in the final stage of the market cycle. We were at “4” one year ago and are now thinking about heading toward “5” on the above chart (actual S&P-500 chart shown further on in this blog). The late-stage is the most difficult in which to beat the market (the S&P-500) because inflation is increasing, the Fed is pulling in on the reins and the majority of assets only offer subpar performance. 80% of the market cycle is made up of the recessionary, early and middle stages of the market cycle and this is when one can really shine and outperform the market, sometimes by a large amount.
What are the best assets for the late-stage of the market cycle? Mid-cap to large-cap quality stocks (Warren Buffett type stocks), momentum stocks, cyclical low-volatility stocks, dividend “grower” stocks, global commodity producer stocks and floating-rate bond proxies.
Why does MarketCycle use ETFs? It has become practically impossible to beat the market via individual stock picking. Most of the big institutional investment houses are firing their stock pickers since they do not seem to add alpha. Individual stocks are almost random in their price moves, while stocks bundled together in the form of an ETF will show trending properties. An ETF is a bundle of stocks (or other assets) that are put together for a reason. These ETFs can beat the market IF they are used to correctly exploit the stages of the market cycle (which requires investing experience) especially by using “factors” and “sectors” and “size.”
The following is an example of a particular ETF that was selected by MarketCycle to exploit conditions during the early-stage of the market cycle; it would beat the S&P-500 by a substantial amount during this two year period of the early-stage (off of the bottom of the financial crash of 2008). The S&P-500 stock index [shown in red] gained 105% during this two year period and this means that a $100,000 account would have become roughly $200,000. The ETF [shown in blue] whose design allows one to beat the market under particular conditions, gained almost 320% during the same two year time frame, turning the same $100,000 into an amount that is too high to even contemplate:
If I had to select an individual stock, how would I, personally, go about it? My process (during this late-stage) would be different than just about anyone else and this would be my thinking at the very beginning of 2016 (as the late-stage began): “It’s the start of the late-stage of the market cycle and the U.S. is leading in relative strength, so pick mid-cap to large-cap United States based companies with international sales and with large pockets of stockpiled money that might get repatriated (under potential upcoming U.S. law changes) that show the properties of quality [high-profit], growth, momentum, lower volatility and that pay dividends that have been steadily increasing and sectors that do well during the late-stage.” SO, this would have lead me to companies like “Chemours” with the stock symbol of “CC”… or “Clayton Williams” with the stock symbol of “CWEI.” Frankly, even Alphabet, Amazon, Apple, Johnson & Johnson and Microsoft are all solid and good stocks for the late stage which, again, is a period when quality stocks generally beat risky stocks. I would buy a dozen companies in order to diversify away the high risk inherent in owning an individual company and then I would have something very similar to a diversified ETF, so why not just buy the ETF? Warren Buffett, who lost almost $1-Billion on his “no lose” IBM individual stock at the open on 04/19/17 might be wishing that he had owned the S&P-500 ETF instead, which was flat for the day.
So, if you buy 12 stocks, three will underperform, three will outperform and six will match the market and it is wishful thinking to believe otherwise. When you buy 12 stocks, you have 12 problems to deal with (and remember that stocks are generally random in their price moves); if you buy 1 ETF, you have 1 problem to deal with (and ETFs generally exhibit trending behavior). That said, somehow, buying individual stocks is still an idea that I play with in my mind and it is slowly driving me nuts… hehehe
Most people that are attracted to individual stocks naturally gravitate toward small-cap growth companies; these are the “black-hole” of investing. You make a rapid 100% profit and then lose 200% before you can get out and then you do it all over again until you are broke because, well, you simply cannot help yourself. People don’t understand how difficult investing is; it is a minefield.
As for myself, I’ve studied the financial markets for over 30 years and it wasn’t until the past 12 months that I’ve come to the realization that, while still learning on a daily basis, I’ve very slowly developed a stronger than normal understanding of how the markets actually work and what risk is.
What does “secular” mean? An alternative definition would be: “Because of certain long-running factors such as inflationary levels, how strong or weak will an asset be over the next decade?”
When will the late-stage end? Historically, the late-stage lasts from one to three years. Since we are currently in a Secular bull market, it is possible that it lasts three years and it started in very early 2016.
When the next recession begins, how will the “secular” idea effect portfolios? It means that the drop during the next recession will likely lose somewhere around 33% rather than the big 55% drops that were seen during the prior two economic recessions (bear markets).
Where is the relative strength? Relative strength shows how strong one asset is compared relative to another asset. Investors always want to bottom fish and they are currently looking at Europe, Japan and Emerging Markets. However, all relative strength is still with the United States. I developed one of the very first relative strength analysis systems back in the 1980s and it is still used by traders around the world via various popular investment newsletters. I am not guessing at this and I know it to be true: When looking at the longer-term view, the U.S. has been leading and it is currently still leading in strength relative to all other regions of the globe.
Don’t commodities normally perform well during the late-stage of the market cycle? Yes they do as long as they are economically based commodities such as oil and industrial metals. Normally gold also performs well as inflation picks up during the late-stage, but President Trump’s policies have put a possible halt to gold outperforming during the current late-stage since his policies, if implemented, will create a stronger U.S. Dollar; the Dollar and gold generally move in opposite directions. Inflation growth is taking a temporary break so commodities may underperform in the near-term before picking up again.
Is “market risk” high right now? The most searched Google word(s) over the past 30 days has been: “Trump World War III.” But the market only temporarily moves on political news; long-term it always moves on market internals and economic & company fundamentals. Stocks represent partial ownership in corporations and these stocks get either strong or weak for the same reasons that the corporations become either strong or weak. When a bad political type event occurs during a “Cyclical bull market” within the confines of a “Secular bull market,” any bad news tends to cause a rapid stock market fall which is followed by a rapid stock market rise, sometimes to new high levels. This means a “V” shaped dip and recovery that is soon forgotten. And it is uncanny how many times the bad events occur when the stock market is already in a bear market, as in “9/11” or the collapse of Lehman Brothers, and MarketCycle’s client accounts would already be positioned for a bear market. So, right now the underlying things that prop up the stock market are still currently strong. On our MarketCycle Wealth REPORT website we are suggesting that members should hold the following near-term outlook on the strength of the underpinnings of the market, although this can and will change:
Seth Klarman: “Most investors are primarily oriented toward return, how much they can make; they pay little attention to RISK, how much they can lose.”
What about President Trump’s actions around North Korea? Let me start by saying that during really bad military conflicts of the past, such as the Cuban Missile Crisis, the stock market took a good sized dip and then, the majority of the time, recovered all losses and moved to new highs within 5 days of the crisis day drop. Five days. It did the same thing when President John F. Kennedy was murdered while in office. Right now, the “Armada” that is approaching North Korea (after mistakenly travelling in the wrong direction for several days) is most likely planning to shoot down any test-rockets fired toward Japan or any ICBMs that North Korea may launch; this group of ships is not big enough or powerful enough to start a war with North Korea and I do not believe that is the actual intent. Trump wants China to economically crush North Korea, which they could do if they are enticed enough to do so. Where does North Korea get its money for its weapons program while its people starve? Three-fourths of its trade is with China. Its money comes from exporting coal and minerals and slave labor to China and Russia, illicit prescription drugs such as viagra, weapons to the Middle-east and Africa and global financial cyber-crime.
Trump’s son-in-law recently brought Gary Cohen into the White House as an advisor for Trump and this very intelligent man seems to be quickly replacing the dangerous Steve Bannon as Trump’s “go-to” strategist. Cohen is from Goldman Sachs and is an environmentalist, a moderate and, surprisingly, a registered Democrat. Additionally, I believe that President Trump is slowly learning (the hard way) that the world is complicated and that believing false information makes complicated matters even more complicated.
What’s up with the U.S. Dollar? President Trump has been recently repeating that the USD is getting too strong and that it has gone straight up since he became President and that this is a reflection of how much people across the globe love what he is doing. Well, first of all, the USD has gone down since he took office and secondly, “strong countries have strong currencies” and the U.S. is very strong right now, plus there are things that Trump plans to do that will cause the Dollar to actually eventually move much higher. So, despite the USD moving lower during the first four months of President Trump’s term (as shown below), I do expect it to move dramatically higher longer-term. (Chart posted on 4/13/17)
Where are we in the current market cycle? One possible target is shown on the following chart as “5” but this may change, possibly even dramatically, as the market cycle progresses and this is why MarketCycle monitors the market cycle non-stop (Chart posted on 4/21/17):
Where do I feel the S&P-500 might be in 15 months? I reserve the right to change my mind as our market indicators change, but right now I’m looking for a zig-zagging 15% to 30% gain and my most optimistic estimate is for the S&P-500 to reach ‘3000’ within 15 months.
Since the start of the year (first quarter) how did MarketCycle’s client portfolios perform against important benchmarks? As of January 1, 2017, we have created fully funded sample accounts which will allow us to show MarketCycle’s market performance going forward while still adhering to the government’s stringent RIA regulations.
- BUY & HOLD Index
- HEDGE FUND Index
- MANAGED FUTURES Index
- MARKETCYCLE Portfolio (lower risk than the other three)
Thank you for reading.
Article by Stephen Aust, MarketCycle Wealth Management