|For me, this is a year of meaningful firsts and lasts.|
This will be the first year since I’ve started tracking my NW, that my overall NW is less at the end of the year than at the beginning (assuming we don’t get a sustained 6%+ rally in December). It’s also my first year of “retirement” (or, as I like to say, “indefinite sabbatical”). And strangely, since I’ve not worked since March, it will be the first year that my total taxable income is more than $5 million, boosted by excess profit on the sale of my primary residence as well as the liquidation of my law practice.
On the other hand, it will also be the last year that my taxable income is ever that high—or close to it. Absent some unexpected windfall or a full-blown return back to the working world — shudder! — my future taxable income should be materially lower.
But, of course, don’t cry for me as that annual income will still be $500K+ per year in perpetuity. I’ll be fine.
All that said, I’m not gonna lie—even with a well-considered plan and lots of wealth built up over the years, those are somewhat unsettling firsts and lasts to think about … indeed, I don’t believe people who accumulate lots of wealth (on their own, anyway) do so without being driven, and that same mentality naturally leans towards beating your own benchmarks year-over-year.
Now my future is tied directly to the performance of the stock market rather than my own efforts. I am no longer just competing with or trying to outdo myself, and I also don’t have the comforting cushion of knowing I’ll earn more when something goes awry.
Believe it or not, that type of shift takes some getting used to, even when you're financially secure, and I’m not mentally there yet.
The good news is that I seem to be weathering the current storm pretty well and settling into the groove despite this year’s bear market. The bad news is this bear might not be done with us as the intraday low on the S&P 500 was only -25% from peak to trough, and that was only 2 short months ago. So it may be a little too early to let out long sighs of relief and, of course, there are plenty of talking heads claiming the first half (or more) of 2023 will be tough. We’ll see.
On whether we’ve bottomed, Jim Chanos says the following:
"If it was a bottom, it would be the most expensive bottom probably in modern financial history. Most bear markets have basically bottomed out somewhere between 9 and 15 times the previous peaks of earnings. If we think that earnings are peaking right now, nine to 15 times would be 1,800 to . . . 3,100 on the S&P. We're a long way away from that."
He’s not mathematically wrong, but it also doesn’t mean this market didn't actually bottom at the 3,500 level a few months ago.
If so, it would mean the bottom was a PE of ~17. That’s not ridiculously high and it’s in line with both the market’s historical PE average (of ~16) and the average from the last 30 years, including the 2007-09 financial crisis (i.e., “modern financial history”).
Indeed, Chanos’ claims about bottoming in an even lower PE range (~9) seem to have more precedent pre-1990.
For some perspective, however, the average bear market lasts approximately 300 days with an average drawdown of 35%.
The current bear market is older than 300 days, but we've only had a 25% drawdown (so far).
The longest bear market was 1973-74, lasting 630 days (just under two years) and resulting in a 48% drawdown. Also noteworthy is the bear market of 2007-09, which lasted about 500 days and resulted in a 57% drawdown. While current conditions are not similar to 2007-09, there are similarities to 1973-74 and so, just for funsies, let's look at them.
The bear market of 1973-74 was not a sudden drop, but a long “mudslide.”
Investors had enthusiastically embraced the "Nifty Fifty” stocks which, in many respects, mirrored the hopes and dreams of the FAANG-gang and similarly situated high-PE growth stocks of late. It was also an era of high inflation, rising oil prices, violent conflicts and instability overseas, an overvalued U.S. dollar, and an uncomfortably high national debt.
This time period was also marked by “stagflation,” which is defined as low growth coupled with both high inflation and high unemployment. As of now we have 2 of those components (low growth and high inflation), but unemployment also seems to be creeping higher with large-scale layoffs and hiring freezes becoming more and more common (something I’d expect to continue in the next 6 - 12 months as we formally enter the recession that’s obviously coming).
With all that said, do bear markets work in such a mechanical way, or are looking for economic comparisons, as interesting as it is, more like dowsing for water? I mean, inflation and oil prices were admittedly high this year, but we’re already seeing that subside quite a bit (oil, in particular). And, while Ukraine is still very much in conflict and we have continuing issues in China, many of the initial “spillover concerns” seem to be abating as well (for the moment). Likewise, even the dollar’s value has come down since September and now we have the Fed suggesting a slow-down in their torrid pace of rate hikes. So, even if unemployment does spike higher, it doesn’t follow that inflation will remain high and growth will remain low.
So which is it—comparable conditions driving bear markets or random dowsing?
Maybe—or probably—it’s a little of both. As Twain said, “history doesn’t repeat itself, but it often rhymes.”
This means—unhelpfully—that the current bear market should end sometime between now and the end of next year and the penultimate drawdown will be at least the 25% we’ve already had or it could be twice as much.
Circling back to my retrospective, however, I’m seeing that a big chunk of this year's drawdown was in growth. Taking a closer look using VUG and VTV as proxies for “growth” and “value," respectively, there’s a huge difference. As most know, growth stocks had an awful year and, at one point, were down 38% … they remain down 28%. Value, by comparison, suffered a drawdown of just under 20% this year … and is now only down 1% for the year.
Maybe the current bear got its pound of flesh out of growth stocks?
Interesting to think about, but I’d take this opportunity to remind myself (at the end of the day, this is really written for me) to remember my overall investment thesis: boring is good, and not caring about what happens in the market is the ultimate goal.
I’ll not pretend that I don’t care at all—I’m not yet a Zen master and it’s even more complicated to be one when, as mentioned above, I’m experiencing some unsettling firsts and lasts—but on some level I honestly don’t care. As long as my dividends keep coming in, and there are no big surprise liabilities, there’s really nothing for me to do but continue "watching the wheels go round and round.”