Mike Lipper’s Monday Morning Musings
Bear Market, Recessions,
Reinvestment
Editors: Frank Harrison
1997-2018, Hylton Phillips-Page 2018
H A P P Y N E W Y
E A R to All
An Explanation
For the very first time since publishing these blogs we suspended
publication during Christmas week. While most blogs suspend publication in
observations of the holidays, we normally don’t. The reason being something could
impact our subscribers’ investments every day.
Although we mainly focus on long-term investing, each
long-term investment journey starts with a first step. Thus, we scan weekly
market activity in search of possible initial steps. Transaction volume during Christmas
week was low and quite balanced between investors believing we are close to a
change in direction and those seeing deeper problems that will take longer to
solve. Thus, a relatively flat quiet market did not send signals to me.
This week I was faced with almost identical low volume fog.
However, I noticed there was more selling than buying on the three main US
markets for the week. I recalled that most non-trader investors spend their
time waiting, while perhaps also worrying. With those thoughts in mind, this week’s
blog is about the critical stages of long-term investing in search of future
rewards: Bear Markets, Recessions, and Reinvestment.
People have been grappling with these issues since the beginning
of recorded time. Since I was not producing a blog this week, I began reading
“The Price of Time, The Real Story of Interest”. The story begins with a
portion of an inscription found on an Assyrian tablet from approximately 2800
B.C. One of the first written attempts to predict the future states “…the end
of the world is evidently approaching.” Therefore, take my views and those of
others with a grain of salt.
As all life appears to be cyclical, it is appropriate to
start the first blog of 2023 with a look at the cyclical behavior of bear
markets, recessions, and reinvestment.
The commonly used term for a bear market is a 20% loss from a
former high. In prior bear markets I have lost 20%
of my worth, but I have not lost my source of income (paying job) or main
source of cash. During 2022 we certainly experienced a bear market, but luckily
not for the full year. The mistake I made in writing my blogs was trying to get
ahead of the crowd by labeling what we went through as the early stage of a
recession. It neither qualified as an economic recession nor was I out of work,
a popular definition.
My problem as both a portfolio manager and blog producer is the
timing of labeling a recession, as it officially gets labeled a recession long
after it begins. The pending label is useful in timing and making investment
decisions. However, in waiting for the “official” label, remember that stock
and commodity markets generally discount the future.
The three types of recessions are
cyclical, secular, and structural. Most recessions include elements of each
type, with one dominating. The most common type is a cyclical recession, which
is generally limited to a price decline from the prior bull market high. The
common perception by most investors and apparently the Federal Reserve is that we
are likely entering a small and short cyclical recession. (Applying my
contrarian nature from the racetrack, I am doubtful that the next recession
will be that simple. Historically, if I am wrong, the penalty won’t be very
large.)
A possible hunting list for stocks might
be those that performed well for many years prior to 2022 and significantly
declined this past year: Apple, Microsoft, Alphabet, Nvidia, Costco, Danaher,
NextEra, Adobe, UPS, Texas Instruments, SalesForce, and S&P Global. All of
these stocks have suffered from pricing, delivery, and other short-term
problems. These issues also appear to be fixable and seem cyclical in nature.
I or our accounts own some of these issues.
The second most common type of
recession is a secular recession, which is caused by changing elements in the
foundation of society. This type of recession generally has a lasting impact on
the economy. Think in terms of women working outside of the home after WWII and
expanding the number of people working, changing the size of homes and gross
income.
We may be entering a period where a large portion of the
population are not qualified or prepared to work in the traditional payroll
structure. The most significant change could be the US, UK, Canada, EU, and
Japan failing to reproduce at a sustainable population rate. Another problematic
change is US students ranking in the middle to lower range on global tests
below the college level. Quantitatively and qualitatively, there is concern regarding
our future leadership.
As we move to succeeding generations, the society and
economy may adjust to these “abnormalities”. Thus, they would be considered
secular changes and hopefully not structural changes.
I suspect these types of changes cause long-term institutions
to modify their portfolios. This may be the reason the State Street Investor
Confidence Index decreased to 75.9 from 90.3 in the fourth quarter. Of interest
are the different global readings: North America 72.2, Asia 86.9, and Europe
102.6.
The third and most uncommon form of recession is caused by structural
change, where the way people think about earning money changes and never goes
back. Typically, these changes are driven by technologies like the steam
engine, the automobile, semiconductors, or by basic changes in government, such
as divorce and inheritance laws.
The problem I have in questioning the type of recession relates
to its likely frequency and financial impact. Which in terms of severity, from
most to least, are cyclical, secular, and structural. However, in terms of
significance to family wealth, the order is in reverse.
If one believes there is an all-knowing power in the sky wanting
to eventually adjust the way humans operate, it might be by using economic
cycles to correct for the way we screw up our lives. Economics is the historic
tool that forces us to do the right thing.
There are multiple imbalances in
almost every sector of our society and its messenger is the economy. There is
hardly any part of society today whose leadership possess superior political
skills, not operational, or judgmental
abilities. Since we seem unable to solve these problems ourselves, we are going
to be nudged in “the right direction” by a secular or structural recession. Corrective
actions won’t likely come from a short or mild recession, as that would be like
putting a Band-Aid on a gunshot wound.
While I clearly don’t know, I am on watch
and ready to adapt the right moves to protect my responsibilities.
Did you miss my blog
last week? Click here to read.
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