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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 (AAPL), Microsoft (MSFT), Alphabet (GOOG, GOOGL), Nvidia (NVDA), Costco (COST), Danaher (DHR), NextEra (NEE), Adobe (ADBE), UPS, Texas Instruments (TXN), Salesforce (CRM), and S&P Global (SPGI). 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.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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