Historical Alerts for Current Investors - Weekly Blog # 676

 

Mike Lipper’s Monday Morning Musings

Historical Alerts for Current Investors

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

From the Ancient Past to Present

The problem with history is that there is too much of it. One can easily pick out any number of events and suggest they foretell the future. Thus, any selection is fraught with biases, incomplete information, and are insufficiently like the present to be worthwhile.  Recognizing these drawbacks and the SEC dictum that past performance is not a guaranty of future performance, there are several historical events that may be useful in thinking about the future.

Ancient Rome

By the 1st Century AD, Rome had transitioned from being a so-called Republic to an empire, although it still needed the support of the bulk of its citizens. To stay in power, the leaders fed the population what was called “bread and circuses”, of cheap food and entertainment. The population accepted these bribes instead of serving in the military and taking on societal responsibilities. Studies of the rise and fall of numerous empires suggest almost all fell from internal deterioration, causing eventual military defeat. 

Subscribers can decide for themselves whether the excess funding for COVID-19 and roads and bridges etc. is like the Roman bread and circuses. Or is enlarged deficit spending perhaps the excuse to raise income and estate taxes to reduce political power bases and enlarge union dues political contributions?

Discoveries of Gold

The discovery and exporting of gold from Latin America and hundreds of years later from California, was interpreted as a sign of internally generated moral superiority. Not only was this wealth delivered with relatively low apparent cost, but it was assumed it would last forever. Little thought was given to the destabilizing impact of the new wealth and the reaction from those who weren’t so lucky.

Vladimir Illich Lenin

He was supposedly quoted as saying “The Capitalists will sell us the ropes with which we will hang them”. Others may have said the same or similar things. (I wonder if a similar comment could be made of Silicon Valley, Wall Street, and other CEOs today. Could they be “selling rope” by supporting excess stimulus spending?)

FDR’s First Term

FDR arrived in the White House with a “Brain Trust”, which led to an enlarged cabinet and new departments. He quickly attempted to pack the Supreme Court with more judges and reduced military spending. The reason for the big rush was that he was not convinced he would maintain political control of Congress after the next congressional election. Consequently, there was a need to push as much legislation as possible through in his first year. (Does this seem similar to today?)

Short-Term vs. Long-Term

Now Focus

While a single week only captures the “hot breath” of the moment, it can be insightful regarding the thinking of the transactors. Of the over 100 mutual fund peer groups I briefly review each week, only five gained on average more than 2.5% for the week: 

Five Best Performing Weekly Mutual Fund Averages 

Precious Metals             +3.54% 

Latin American              +3.51% 

Agricultural Commodities    +3.06% 

Large-Cap Growth            +2.92% 

Base Metal Commodities      +2.82% 

 Precious Metals - Gold mining stocks up, but not gold

 Latin American - Recovery in Brazil

 Agricultural Commodities - China buying more than expected 

 Large-Cap Growth - Politics Driven

 Base Metal Commodities - Reflation in Asia

There were 8 Precious Metal funds in the top 25 and 8 Natural Resource funds in the bottom 10 for the week. The 8 Natural Resource funds probably reacted to very current price trends. The performance of Energy funds and Precious Metals funds are often more parallel than divergent.

Markets See Things Differently

The New York Stock Exchange (NYSE) is the senior market in terms of size, history and perhaps prestige, but the NASDAQ may be the savior due to the relative absence of large, passive investor pools. The junior market has more stocks listed and proportionately more “tech” companies. While the image of the NASDAQ is that it is more speculative, the table below suggests it does not appear to be so this week. 

 

Exchange    Number of Highs    Number of Lows

  NYSE            669                54

 NASDAQ           518               128

I believe the NYSE gets more passive and individual investor transactions than the NASDAQ. NYSE prices move more in line with the weekly sample survey of the American Association of Individual Investors (AAII). In their latest survey, 56.9% were bullish on the outlook for the next six months. This is one of the more extreme readings and is often viewed by market analysts as contrary to future results.

Longer-Term

While it appears we are in an up-market for the moment, long-term investors are focused on the next major move. Unless there is a dramatic change in how people think, the current expansion will be followed by a measurable contraction, followed by another expansion. There is no guaranty however, many of us lived through a relatively flat period from 1968-1982 as the country was adjusted to the ending of the Vietnam war, severe inflation, and its correction. Today there is too much debt being financed outside the banking system. It will take a long time to be liquidated and could lead to a longer than normal recovery.

From 1900 to Present

The following instructive tables of the S&P Historical Composite show the Inflation-Adjusted Secular Highs and Lows.

         High from               Low from

Year     Prior Low     Year     Prior High

1906       +334%       1921        -69%

1929       +396%       1932        -81%

1937       +266%       1949        -54%

1968       +413%       1982        -63%

2000       +666%       2009        -59%

Current    +315%

According to Steve Blumenthal of CMG, the above chart shows:

• Secular bull gains totaled 2075%, for an average gain of 415%
• Secular bear losses totaled -329%, for an average loss of -65%
• Secular bull years totaled 80 vs 52 for bears, or a 60/40 ratio.

While the ratio of years is correct, to me the more significant fact is that since 1877 only the 1932 low was below the prior low, suggesting a portfolio with a buy and hold approach, using diversified mutual funds, probably works under most conditions.

Question of the week:

What of all the elements in this blog makes sense to you?

Did you miss my blog last week? Click here to read.

https://mikelipper.blogspot.com/2021/04/respecting-opposition-market-weekly-bog.html

https://mikelipper.blogspot.com/2021/03/the-biggest-risk-we-all-face-weekly.html

https://mikelipper.blogspot.com/2021/03/2-presidential-lessons-to-be.html

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