Is the Bear Hibernating….or Just Resting?

Last Thursday the S&P 500 closed above the threshold that marked its exit from the longest bear market since 1948. To be clear, this was not the worst bear market in terms of percentage declines, but it was the longest in terms of days; this bear market lasted 248 trading days.

Now, investors are questioning: “Are we really out of the bear market or is this just a head fake?”  As with any stock market topic or debate there is never a shortage of opinions. But as Warren Buffett said at his annual meeting---Just follow the incentives; most financial pundits will have an ulterior motive, and their opinion on the market will usually echo that sentiment.

For the most part, bears will argue:

1. Stocks are way too expensive (relative to earnings).
2. The breadth of the market is too narrow; only a few stocks are driving the returns (In fact, only a handful of stocks now comprise 30% of the S&P). Check out the VIDEO we did on this topic!
3. That…”hard-to-predict”….recession will be here any day! 
4. The market is overbought on a technical basis.

Those who are bullish will counter with:

1. The Fed is done (…or nearly done) raising interest rates.
2. Inflation is coming down.
3. There will be no recession, only a soft-landing.
4. Too many investors are out of the market or underinvested; FOMO (fear of missing out) will cause these investors to chase this rally. 

So, which is it? Again, we remind you not to be influenced too much by either side; most of what you read and hear will be used to promote an agenda. As Buffett warned, follow the incentives of who is saying what…And think about confirmation and anchoring bias. Of course, the correct answer for whether the market has definitively exited bear market territory and entered a new bull market is that…..nobody knows.  But if you have a solid financial plan, invest properly and have reasonable expectations, it shouldn’t matter.

Our opinion on these narratives:

• Only parts of the market are too expensive-we are definitely surprised by how quickly speculation has come back in some areas of the market. 
• Spending even one minute trying to predict a recession is wasted time. 
• In our minds, investor sentiment is such an important metric to consider (as a contrarian indicator).  One of the reasons why markets continue to prove resilient is that the popular view for years has been a crash is right around the corner. Bearish sentiment has been hanging around record highs for years and cash levels are elevated. When everyone is excited, fully-invested and bragging at the summer BBQ’s about how much money they are making in the markets is the time to be worried…..Not so much when every headline is negative! 

Want further proof that we should all be very skeptical of Wall Street predictions?

Let’s consider the stock Nvidia’s recent earnings report. Nvidia (NVDA) has become a “market darling” in the fast-emerging AI space. While we don’t know exactly how many Wall Street analysts cover the stock, suffice it to say, as one of the premier tech companies, NVDA is very widely-followed. The job of a stock analyst is to know the companies they follow inside and out. And for the upcoming quarter, analysts are expecting NVDA to report $7 billion in revenue. However, the company now expects sales of $11 billion for the period!  $11 billion represents a $4 billion difference between “forecasts”.  How could so many skilled professionals be so far off the mark? As has been attributed to the great “philosopher” and baseball player Yogi Berra, “It is difficult to make predictions, especially about the future.”  So true.

At NCM, we focus on building/managing portfolios that help our clients achieve their financial goals and, hopefully, to live better lives. It is important to remember that every investment/strategy does not work every month, every quarter or even every year. Should that bother us? No. There has never been a strategy that will ever yield positive results 100% of the time or consistently “outperform”. Which brings us to another misused word…”outperform”. What does that exactly mean? Wall Street constantly uses this word.  Why? Because they want us to continuously shift our investments into whatever is “outperforming” at that moment. The only way we should be thinking about the word “outperform” is in relation to our financial goals. That’s what we want to “outperform” – our financial goals! Outperforming any random index? Well, that’s not necessarily going to help any of us buy that vacation home, retire early or achieve any of our other financial-based goals. Recency bias has many investors thinking all they should invest in is the S&P 500. But if retirement investors followed that strategy in the lost decade of 2000-2010 and even “outperformed” by let’s say 2% a year well that investor ran into some serious problems with their retirement spending by the end of the decade- this is an example of what we mean by outperforming an index but underperforming your financial goals!

So far this year market performance has been driven by a few mega cap tech stocks—it truly IS a narrow market. And our beloved dividend and option strategies that fared incredibly well in 2022 are off to an average start in terms of price returns- they are “underperforming” the S&P! Should we panic and sell them? No. We instead consider that a generally equally weighted basket of them can generate mid to high single digit percentages  in annual income. Today, there is so much controversy in the financial planning world with the so called “4 % rule”. Another reason why we favor these strategies for retirees is that they can deliver income far above this threshold to help our clients live better lives.

In the 14 years that NCM has been advising clients, it is our belief that all clients who have been diligent in maintaining their spending and savings levels within our “guardrails” have had improved retirement outcomes thus far. Now, while we have not experienced a 2008-2009 financial crisis during this period, we have gone through roughly 20% stock market declines in 2011, 2015, 2018, the 33% decline during Covid in 2020, arguably the worst year ever for a balanced investor in 2022, and now (hopefully exiting) the longest bear market since 1948. For those that may waver above these guardrails with their spending, rest assured we are proactive in notifying you about the future potential risks of doing so well ahead of time.  

As always, please reach out to us with any questions.

We hope all the fathers reading this have a wonderful Father’s Day!

Best,

NCM Capital Management

Disclosures: This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of NCM Capital Management, LLC and are subject to change at any time based on market and other conditions and NCM does not undertake to update or supplement its newsletter or any of the information contained therein. Past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. There is no guarantee that the investment strategies discussed above will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services.  For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV.