The Money Gods' Price For Achieving High Returns

Summary:  During their lifetime, most investors will likely endure another decade-long bear market like the ones in the 1970's and 2000's. Younger investors will probably suffer through at least two.

When thinking about the last 20 years, investors easily recall the tech bubble, the financial crisis and the flash crash in 2010 that together form the most recent lost decade for equities. These negative events dominate our decision making. The (more important) 300% return from equities during this time does not.

For all the time spent worrying about bear market risks, the overwhelming majority of short term traders and professional fund managers haven't found a way to avoid it. And if they have, it has been at the expense of also missing out on the gains during bull markets.

If you are going to do better than most, it won't be by continually anticipating a market crash. That has invariably been an exit ramp onto a dead end street. Tuning out noise and consistently following investment rules and hard data is far more challenging than it sounds, but the performance of those that who do it can be in the top 5%, maybe the top 1%.

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If you are in your 40's or 50's, you will probably endure another lost decade like the 2000's, where stocks did not appreciate on a net basis. If you are in your 20's or 30's, there's a good chance you will endure at least two such periods in your lifetime.

The future could turn out different than the past, but the pattern over the past 120 years is that expansions alternate with long periods where equity markets churn sideways. That's true even if you include dividends and assume dollar-cost averaging (DCA). The chart below shows the length of time US equities have spent getting back to breakeven from a peak (from Lance Roberts; read his recommended article here). Enlarge any chart by clicking on it.

Interview on Real Vision Television

We were interviewed on Real Vision Television on May 29th. During the interview, we discuss our long term equity market view, the current macro-economic environment and market technicals.

Our thanks to Real Vision for the opportunity to share our thoughts. Click here to become a subscriber.

To watch the interview, click here.

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Time To Not Freak Out About Debt Again

Summary: Debt is a perennial worry.  It's a natural human tendency to think of debt as bad, that by incurring debt we are living beyond our means. But much of what you hear about debt in the US is hyperbole. Here are the facts:

Household debt has fallen in the aftermath of the Great Recession: on a per capita basis, it's back to the same level as 14 years ago. Households' debt relative to their net worth is as low now as in 1985. For all the consternation about the threat posed by student loans, their default rates are actually falling.

Corporate leverage today is not materially different than it was in 1993 or 2003, i.e., early in two expansion cycles. The delinquency rate on corporate loans is lower than at any time during the prior three expansion cycles. High yield spreads are falling and default rates are well below average.

The "tax reform" bill signed in 2017 is forecast to further expand the federal debt.  But examples from around the world do not show a strong correlation between federal debt and economic growth over the next 5-10 years. For all the hand wringing about high federal debt, the interest cost of that debt is just 1.3% of GDP, as low as during the halcyon days of Eisenhower and Elvis.

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Like most people, you're probably worried about the amount of debt in the US.  We seem to be going broke. Enlarge any chart by clicking on it.

Weekly Market Summary

Summary:  US equities are up two months in a row and positive for the year. They are outperforming the rest of the world, despite ongoing Quantitative Tightening here and QE abroad. In the past few days, the Nasdaq has joined the small cap indices at new all-time highs. With expanding breadth momentum and a solid macro backdrop, the outlook for (still rangebound) large caps is positive.

The upcoming weeks could test investors' resolve. Options expiration, an FOMC rate decision, the DPRK Summit and weak mid-June seasonality are all on deck for next week. The early June gap ups in SPX are very likely to fill.

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US equities rose for a second month in a row in May. SPX gained 2.5%, NDX gained 5.7% and small caps gained 6.1%.

Increased volatility has given 2018 has the feel of disappointment, but YTD, SPX is up 2.5% and NDX is up over 11%. Enlarge any chart by clicking on it.

June Macro Update: Unemployment Claims at a 49 Year Low

Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.