Mike Lipper’s Monday Morning Musings
What
Do Single Digits Mean?
Editors: Frank
Harrison 1997-2018, Hylton Phillips-Page 2018
Rates of Change vs Available Time
Politicians have an
advantage over us mere mortals, they know the exact terminal date of their
efforts. That is, the day after their election is all important. Remember, the
administrative state is largely dependent on the whims of political leadership,
so it helps to focus on them for predictions as to the future. For example,
there is increasing evidence that the Federal Reserve is split between those favoring
preservation of happy economic feelings and those trying to preserve the
economic well-being of the economy. That is how I read the Chairman’s speech
from Jackson Hole. The Federal Reserve Chair is attempting to guide a split
board toward focusing on the survival of the present economic system rather than
generating “bribe money” for the next election. That is why the betting odds suggest
we may not see meaningful change until after election night. Supporting this
view is Cumberland Advisors headline “Higher, longer? Nope. Lower, soon? Nope.
Same for 2 years? Yup!
I have come to the same
conclusion as David Kotok, Chair of Cumberland Advisors, although I use two
very different approaches. Bad history repeats and the actuarial analysis of
past results by excluding extremes.
The current occasional
resident of the White House, Delaware, and other hideouts is a well-known fan
of FDR. He has followed the prescription of never letting a problem escape
other desired solutions. FDR took advantage of excessively lose credit controls
to change a recession into a depression, attempting to override The
Constitution. The period resulting from stagflation lasted until the beginning
of the US involvement in a World War. FDR was bailed out by the Axis reacting
to his actions. (Among them were a ban on oil sales to Japan and the refusal to
let a ship full of immigrants trying to escape Hitler’s Europe land in the U.S.,
among other things.)
At one point in the
history of Prudential Insurance, the little known but politically powerful
executive was the chief actuary. This was supported by their board and also occurred
at other surviving insurance companies. The power of the actuary was in setting
the rates charged for insurance. During a brief conversation with him, he revealed
that he focused on experiences to set rates. (Similar to handicapping horse races
and securities analysis.) This was not a mechanical exercise, the actuary
decided how events would be weighted and which events would be ignored. In a
similar fashion, I look at recent mutual fund performance to project the most
likely future performance of the average mutual fund when properly positioned
within comparable funds.
The Pandemic, Beginning
or End of Period
Using an actuarial
approach to study mutual fund performance history back to the 1960s. One can
roughly classify the period from 1957 through 1968 as expansion, and the next
period until the mid-1980s as excessive expansion. This led to another period
of stagflation, which was followed by another period of expansion until the
second decade of this century. A market decline and a good bull market then followed.
The pandemic started in
2019 and lasted largely through 2022, a period of excessive funding to buy
votes. It is this history that allows me to use an actuarial approach to downgrade
performance history prior to 2020. This is why in the next section I will attempt
to guess future mutual fund median performance beginning with the prior peak to
current levels.
What Will Average Fund
Performance Be?
The following analysis is
more of a future scouting report than an exact prediction. To be successful I
hope it is largely correct in terms of long-term direction and close in terms of
actual results. Although it is possibly too conservative. The following table
utilizes data from the London Stock Exchange Group, the current publisher of
the “Lipper “data.
Change in Total Reinvested Return
Year 13 Weeks 2/19/20
to to to
Fund Type --------8/24/23----------
Large-Cap
Cap Weighted 15.10 4.29 6.76
Median 9.09
2.93 5.00
Difference -6.01
-1.36 -1.76
Mid-Cap
Cap Weighted 7.29
4.57 4.36
Median 7.17 4.30 4.31
Difference
-0.12 -0.27 -0.05
Small-Cap
Cap Weighted 6.36 5.02 4.78
Median 7.17 4.15 4.31
Difference +0.81 -0.87 -0.47
“Value”
Cap Weighted 5.30 4.72 6.49
Median 7.46 2.99 5.81
Difference +2.16
-1.73 -0.98
“Growth
Cap Weighted 15.07
3.77 5.01
Median 8.76
3.02 3.63
Difference +6.31 -0.75 -1.38
Analysis
- There are only two differences over 5% and both relate to the “magnificent seven” performance of seven growth stocks. This is significant, unusual, and unlikely to be repeated in the long-term future. Notice a narrowing difference in the last 13 weeks and a slower rate of change from the last peak.
- In the current market, larger funds are performing better than the median in their fund class. The difference is probably due to stock selection and possibly lower expenses/transaction costs. However, the heavyweight advantage is within the range of mistakes we increasingly find within society.
- Our focus is to try to find the middle for portfolio management purposes. I am extremely aware that the “magnificent seven” are up +93% and regional banks are down -37%. As a contrarian looking for long-shots I suspect some regional banks will perform better than some of the “magnificent seven” in the future.
- One message from the Chairman’s speech at Jackson Hole is the expectation of lower than present overall growth. This would tie with stagflation over the next two years.
- Long-term, those in lower tax brackets could get hurt by higher inflation caused by labor costs and tariffs hurting consumption.
- If the NASDAQ Composite continues as the single best indicator of general market direction, its significantly greater number of declining vs rising stocks compared to the S&P 500 is a worry.
Conclusion
September could be a
difficult month, which may not improve significantly for two years. Please
convince me I am wrong.
Did
you miss my blog last week? Click here to read.
Mike Lipper's Blog: Some Past Errors Create Future Problems
- Weekly Blog # 798
Mike Lipper's Blog: Inputs to Implications - Weekly Blog #
797
Mike Lipper's Blog: Markets
Are Time Frame Exchanges - Weekly Blog # 796
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