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đ¶ Vibin'
Itâs been a heavy market environment this week in the midst of a choppy Q3 earnings season, which can lead one to be discouraged. But there are many things we can feel optimistic about if we choose to look.
So with these mixed emotions in mind, this week Iâm vibinâ to All You Ever Do is Bring Me Down by the Mavericks from their 1995 album, Music for All Occasions. Enjoy.
đ Â Quote of the Weekâ
âThe most important single ingredient in the formula of success is knowing how to get along with people.â â Teddy Roosevelt
đ Â Chart of the Week
I thought it might be helpful to look at the current market weakness from a historical perspective. As you can see in the above chart, the worst 5 drawdown periods in stocks since 1800 have ranged from down 43% to down 84%.
The current drawdown period, as expressed by the S&P 500, began when the market peaked in late December 2021 and troughed in October of 2022, down 25%. The S&P 500 now sits roughly 15% below its all time high. We are now 22 months from the prior peak, a fairly lengthy drawdown period.
What is troublesome and makes things feel different this time in the current drawdown period is the performance of bonds, which have historically been negatively correlated to stocks during drawdowns and showed positive returns. This time, bonds have shown a strongly positive correlation to stocks and have in fact performed worse than the stock market by some measures.
I believe now that inflation expectations have come down to earth, a brief, perhaps sharp recession is quite possible in the near term. However, I also believe that recession is largely discounted in stocks, but not in bonds.
If the recession scenario plays out and if we can at least begin to get our fiscal house in order thanks to the return of the bond vigilantes, then I think the current positive correlation between stocks and bonds could continue. This should offer excellent return opportunities in both asset classes, and allocations to both will likely be sourced from cash, which could again become trash.
đ Interesting Drive-By's
This week we have articles on the impact of the pandemic on young professionals, learning techniques, portfolio management, and commitment:
đ Why are Young People Rich and Miserable? - from wise beyond his years Jack Raines. My adult children experienced the dynamic Jack writes about, so I witnessed it first hand.
Imagine that you graduated in 2018 and started working that August. A year and a half later, as you are starting to hit your stride in work, youâre forced to work from home indefinitely. A prisoner with a paycheck.
Then the stock market experiences its fastest crash ever. Rumors of widespread insolvencies bombard the media. Bill Ackman is crying on CNBC, proclaiming that âHell is coming.â Is this your generationâs 2008?
Your net worth falls 30% in a month with your portfolio, and you have no idea whatâs going to happen to your job and your savings.
Then the Federal Reserve kicks off an aggressive round of quantitative easing to stabilize financial markets. The government ships $4,000 stimmy checks to anyone and everyone locked in their homes. The outside world is still on pause, and thereâs nowhere to spend your checks, so you dump them in the stock market, fueling the fastest rebound in history as the S&P and Nasdaq ricochet to new heights in a matter of months. And this was just the base case scenario for your average 25-year-old in 2020. [link]
The objective of this paper is to examine the absolute and risk-adjusted effects on distribution rates and total wealth created by adding loss-limiting trend following strategies to buy and hold portfolios. Using 150 years of equity and bond data, we found that applying trend following to distributive portfolios results in less frequent and less severe failures compared with a buy and hold strategy. Additionally, we concluded that trend following allows for an increased allocation to equities without increased volatility relative to buy and hold. As a result, at the same level of volatility, portfolios can create greater total wealth and distributions. [link]
Iâve discovered a tradeoff between the shine of novelty and the consistency of commitment. Western culture over-indexes on novelty. It suffers from commitment phobia. I see this in our culture of digital nomadism, job-hopping among yuppies, and listening to books at 3x speed instead of reading them deeply. Anxiety is the driving force behind this game of hopscotch.Â
The problem is that a life without commitment is a life spent hugging the X-Axis.
If you have any cool articles or ideas that might be interesting for future Sunday Drive-by's, please send them along or tweet 'em at me.
Please note that the content in The Sunday Drive is intended for informational purposes only, and is in no way intended to be financial, legal, tax, marital, or even cooking advice. Consult your own professionals as needed.
âI hope you have a relaxing weekend and a great week ahead. See you next Sunday...
Your faithful financial provocateur,
-Mikeâ
If you enjoy the Sunday Drive, I'd be honored if you'd share it with others.ââ
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