What to Buy?

Stocks are down, no doubt. Market wizards are all over the place these days predicting the S&P 500 up 40% to down 40%! They are probably BOTH right but assuredly WRONG in their timing. What to buy? Also assuredly, SPY and QQQ. Here are their annual returns since 2000.

SPY = SPDR S&P 500 ETF Trust and tracks the S&P 500 index.  

QQQ = Invesco QQQ Trust and tracks the NASDAQ-100 Index®.

2000 to 2002 were a bust for both indexes arguably on the heels of the dot com bust and 911. 2003 was a recovery year with both ETFs up sharply. QQQs up 50%!

Markets subsequently rose, sometimes barely and sometimes up nicely, until the bust in 2008! Market's fell to their 2002 levels. The stock market time machine went in reverse. 

But who knew the gears would shift in 2009 to erase the prior year losses! The following decade marked a period of unmatched growth, posing new highs almost every year, 2018 excepted. 

After all that, markets posted the three highest gains EVER from 2019 to 2021! This in spite? because of? worldwide Covid pandemic. 

And this year, as of Friday's 7/15/2022 close , we ARE down but really how much? Both the SPY and QQQ are still above their 2020 closes.

HOW will 2022 end? Up 40%? Down 40? No one knows. And let's stop pretending that someone does know.

What to buy now? 

"Now" was NOT in the title for this post because "Now" doesn't really matter. We buy, when we are flush, what history tells us will "outperform" the "other choices" over the long term. Outperformance = the indexes (SPY and QQQ) and other choices are "everything else".  Long-term means lifetimes, earnings years, family, education and retirement. 

For those with lots of cash (another word for underperforming investors), or the young, today's buy will take you back to the middle of last year. But, yes, buy now. 

When to sell? 

Sell ONLY when you need the cash or when you have to. Which brings us to our next fact. What we do know is that in 2022, for the first time in years, many retired investors will have to sell holdings to meet their RMD (Required Minimum Distribution) withdrawals at large losses. 

For the first time in our short memories, these withdrawals, marked at high 2021 year-end prices, will create losses AND high taxes. This is a double whammy from the deal we made to be IN the market and hold IRAs. Again, living through market declines is the price we pay for superior long-term performance. (Caveat: the government might change this but don't count on it.)

The stock market time machine marches on. The fundamentals of aging population demographics have not changed while Pandemic and War, the predicate causes of today's declines, will.

Why SPY and QQQ? These are the largest most liquid broad based stock index ETFs in the world. You can't buy indexes but almost anyone can buy these-almost at no cost. And, as spglobal.com will tell you, active managers cannot beat the S&P. WHY? That's a subject for another post. SPY is interchangeable with any large S&P 500 or total market tracking fund. Ditto for QQQ and Nasdaq 100 funds.  Finally, why cherry pick 2000 to the present? Cherry picking or not, the results and conclusions do not change over time-using start date 1970, 1945, 1900, 1800 or 1600 (Dutch and UK markets) or more... applicable results are the same.

Disclaimer: Posts are for education only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2022 George Rahal

Dow Theory

 The "Dow Theory" ascribed to Charles Dow, founder of the Wall St. Journal, in the late 1800s, is a somewhat vague model of the American economy but goes something like this. 

There are three parts to the economy: industry, transportation and utilities. 

Industry pays utilities for energy to build products and then pays transports to ship products to consumers who then pay industries as products are consumed. Demand for each part depends upon the other. Which comes first? The chicken or the egg? is a universal question.

Dow created three indexes to represent each sector: the Dow Jones Industrial Average, the Dow Jones Utility Average and the Dow Jones Transportation average (originally called "Rails"). Remember, this was before cars and trucking.

The monkey in the wrench here is "Inventory"! Meaning if sales fall, inventory will rise, then shipping will fall and then, finally, once factories reduce production, utilities will fall. A healthy economy will have stable to falling inventories (if factories produce what people want), rising transportation, booming factories and booming utilities-all reflected in the Dow Jones Averages. The basic idea is that it takes time for increased inventories at the sales counter to be reflected in reduced shipment, reduced production and lower utility sales. 

Let's look at these averages since 2000.

Compound Annual Growth Rate

How interesting! In 2000 utilities were still booming as the industrials fell and transport was roughly unchanged. Were factories overproducing? Were production costs too high? In 2001, utilities and transports corrected while factories continued falling. 2002 may have been a capitulation. Production collapsed, as did the utility average and transports took its hit too!

2003 was a big recovery year for all indexes. It looks like transports and utilities were the end of the economy's bullwhip.

Industrial growth continued at a lower pace for the next few years. Note that transports were the canary in the gold mine with 0% return in 2007. 

2008 walloped the markets with their largest collapse since the Great Depression. Oddly enough, there were no wars and no pandemics, just a true economic recessions that took all ships down. 

2009 was the start of an impressive decade of recovery and boom. The fact that transports fell in 2011 while industry grew may be a sign of the strong  inventory control during this period. The hiccup in 2018 may also be a sign of this strong control. Transports took the hit while industrials and utilities barely budged.

Today, the markets may FEEL a lot worse than they were, they appear to be struggling at inventory control. Transports are down over 20% as factories and even utilities struggle.

INDU = Dow Jones Industrial Average
TRAN = Dow Jones Transportation Average
UTIL = Dow Jones Utility Average

YTD as of 7/12/2022

Data Source: barchart.com

As bad as it feels, the economy as seen through these lenses is not very different than the recent past. The headlines may be blaring about "worst ever" but the numbers clearly don't show it. In 2000, it took three years for the markets to recover from the dot com crash and 911. Today-with pandemic and war-only time will tell. 

While Dow Jones Averages have many critics as price indexes and have been supplanted by S&P indexes and many others, they still ARE the most widely watched measures of the stock market and as such, merit our attention here. 

Disclaimer: Posts are for education only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2022 George Rahal

Worst Market Ever???

Is this the worst market ever? The worst economy ever? The worst inflation ever? Well, lets look at commodity prices and see. Let's look at the benchmark Bloomberg Commodity Index since inception in 1991 to 6/30/2022:

BCOM ER =Bloomberg Excess Return Commodity Index
Source: bloomberg.com

The index price is UP from a 10 year bear market but way closer to its low than its high. So, thats the commodity index. Let's look at energy. (The following charts are all Bloomberg Excess Return Sector indexes.)

This chart clearly shows the pain at the gas pump (up 64%!) but interestingly the crude oil price and, to a lesser extent the heating oil price, don't reflect this entire gain. If the feedstock, oil, is not up but the wholesale unleaded gas price is up, this implies that non-commodity factors are affecting prices at the pump.

Mainly these are transport and labor. But wages are not up this much (roughly up 5% this year) so we are left with the same answer for everything in 2022, its the supply disruptions from the non-economic external effects of the double whammy of Covid and a brutal war. 

What about food? 

A lot of the same picture. For the food we eat, agriculture in general and to a lesser extent, wheat, do NOT reflect high inflation. Soybeans, on the other hand, with Ukraine a major world producer DOES reflect food inflation and, of course, this is due to war.

What about livestock?

The wholesale cattle market, as high as it is, is trending LOWER. Pork and corn (mostly used for livestock feed) are near all-time LOWS! While social trends can account for some of these declines, the livestock markets have always been a nightmare of supply variation, storage and transport. Again, if supermarket prices are high, its NOT because of commodity and labor inflation. 

Finally let's look at the traditional measure of inflation, precious metals and, for comparison, industrial metals:

While up, neither is at all time highs. While precious metals "should" reflect price inflation and industrial metals "should" proxy for the economy, they look more in lockstep now than in 2011. Neither reflects worst inflation ever.

While headlines cry wolf, we may have to realize that today's prices are more reflective of external factors, pandemic and war, than true economic mailise. The economy is fundamentally a function of demographics - the first world demographics of increasing retirements and too few young to replace them has not changed. Pandemic and war, hopefully, will!

Why use Bloomberg Commodity Indexes? The Bloomberg Commodity Indexes are the world’s premier DIVERSIFIED commodity indexes. The S&P GSCI index is heavily weighted to energy. Why the Excess Return index? Excess return indexes measure pure commodity futures price returns without adding Treasury Bill interest rates which the “headline” Total Return indexes do.

And, why cherry pick the 1/2/1991 start date and 6/30/2022 end date? These are not cherry picked, they are the index inception date and the current quarter-end.  Finally, why use index prices and not actual prices? Each commodity has a different price measure, prices are indexed/normalized by Bloomberg for valid comparisons. 

Disclaimer: Posts are for education only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2022 George Rahal