Stocks peak about every 36 years, most recently in 1929, 1965, and 2000. This 36 year cycle can be traced all the way back to the earliest eras in recorded human history, back to Pythagoras and Plato and the Axial Age around 600BC. After each peak comes a period of decline (punctuated by bear market rallies) that typically lasts 16 years or so. Then, with the excesses of the prior bull period wrung out and investors most depressed, the next 20-year run to the next market top can begin. Since 1927, the markets have spent 83% of the time at or within 10% of all-time highs.
Howdy, Bull-Riders:
Scotland Yard detective Gregory: "Is there any other point to which you would wish to draw my attention?"
Sherlock Holmes: "To the curious incident of the dog in the night-time."
Gregory: "The dog did nothing in the night-time."
Holmes: "That was the curious incident."
- From The Adventure of Silver Blaze by Arthur Conan Doyle
Yesterday we learned that the January Personal Consumption Expenditures (PCE) Index rose 2.4% from last year, a slowdown from December's 2.6%. The core PCE Index, the Fed's favorite inflation indicator, rose only 2.8% from last year. That was the lowest annual increase since the 2.2% increase in March 2021.
But the stock market did not explode higher Thursday until the usual end-of-day ramp, and that was the dog that didn't bark. It tells you everyone who wants to buy stocks right now has done so, and they're waiting for someone else to push up stock prices. But for now, “someone else” seems to be AWOL. The most likely short-term path forward is down.
Most investors are asking the second-biggest question: “How long can the current uptrend continue?” That means last week's recommendations of some portfolio insurance seems especially timely if you are worried about a decline lasting a few months. Whether you buy the April 30 SPY $505 put (SPY240430P00505000), the April 30 SPY $410 put (SPY240430P00410000); a reverse index fund like the ProShares Short S&P 500 ETF (SH), ProShares UltraShort S&P 500 ETF (SDS), or ProShares UltraPro Short S&P 500 ETF (SPXU); or an increasing volatility fund like the ProShares Ultra VIX Short-Term Futures ETF (UVXY), you should do OK.
Remember that portfolio protection is insurance, and the cost of it is the insurance premium. Just like you don't want your house to burn down so you can collect on your fire insurance, or your car to be wrecked, you don't want to make money on portfolio insurance. It's there to let you stay invested in this secular bull market that won't hit a major top until 2036. Consider the cost of portfolio insurance as an expense – gone money you never will see again.
The biggest question every investor should be asking but isn't: “Can I stay invested in the great bull market to 2036?” To the extent history is of any use, this rally is still far more subdued than the great melt-up of 1999 and 2000. The Nasdaq 100 (NDX) is around 35x trailing 12-month earnings. In the late '90s tech bubble it went into the 90s. Which side of 1999 are you on?
h/t @TheMarketEar
Another way to look at that is in 1994, the surge in IT capital spending and productivity started a multi-year uptrend for Nasdaq. This time around, I believe ChatGPT in 2022 was just the beginning of a much bigger uptrend driven by the AI and metaverse revolution.
h/t @TheMarketEar
And unlike most bubbles, we aren't seeing obvious signs of high and rising leverage. Margin debt has actually been falling recently. As has the ratio of margin debt to the size of the stock market.
h/t John Authers
Fed officials have signaled they do not need better news on inflation to cut rates, just continued good news. The trend in inflation still is downward and that's good news. But I still don't think they'll cut the Fed funds rate until August or September, and Wall Street still believes there will be three cuts this year starting in May or June. That could keep a lid on stock prices for a while.
Market Outlook
The S&P 500 added 0.2% since last Thursday to a new record close today. It is up 6.8% year-to-date after booking the best February since 2015. The Nasdaq Composite gained 0.3% to an all-time record, its first record close since November 2021. The Naz is up 7.2% for the year and also had its best February since 2015. The SPDR S&P Biotech Exchange-Traded Fund (XBI) won the week, climbing 4.5%. It is up 10.2% year-to-date. The small-cap Russell 2000 rose 1.1% and is barely up in 2024, just 1.4%.
The fractal dimension is as stretched as I've ever seen it. The S&P could go sideways for several weeks in the necessary consolidation, or take a sharp, temporary dip.
Economy
The Atlanta Fed's GDPNow model still is looking for strong 3.0% real GDP growth in the March quarter. The Blue Chip economists are slowly getting on board.
Golden Age Portfolio Update
This was a very good week for the portfolio as it jumped 5.2%. We're now up 20.1% in 2024 with much more to come. Let's dig in...
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