The other day I wrote about the presidential cycle and how I thought it was more than just a coincidence that the stock market performed poorly during the first year of a president’s term. Interestingly, the next day Jeremy Grantham, one of the smartest members of the “smart money” class, was quoted in an article in the Wall Street Journal with the headline, “Why 2013 May Be Another 1973 For Stocks.” For those that don’t know 1973 marked the beginning of a two year bear market that was one of the most painful for investors in history. His reasoning? The presidential cycle. From the article:
An investor can cherrypick data to no end, but a particularly worrying statistic is the market’s return the year after an incumbent has been reelected: a negative 0.3% on average. In contrast, the market has returned 24.9% in the third year of a president’s first term.
The reason I call Grantham, “the smartest of the smart money class,” is that he’s been managing money for decades and has made some of the most prescient calls I can remember. He was one of the lone voices of reason during the internet bubble and turned very bullish near the bottom of the financial crisis. His work is also valuation based which suits my sensibilities. So the fact that he is now taking a very cautious approach to stocks has me paying close attention with one caveat: Grantham was bearish and wrong for much of the 2003-2007 bull market.
Another super-investor raising the red flag for stocks is Jeff Gundlach. Jeff has arguably taken the “bond king” crown from Bill Gross due to his unmatched investment performance over recent years. Jeff argues a similar case to my, “Ben Bernanke and the Great Confidence Game,” argument. It goes a little something like this: the Fed’s “quantitative easing” programs have been very successful at juicing risk assets over the past few years HOWEVER each new program sees diminishing returns. Should market participants lose faith in the Fed’s ability to support risk assets we could see a sustained selloff, aka a new bear market.
This is a thesis that I pay a good deal of credence to. Still, Gundlach is a bond guy. There is a chance he follows in the footsteps of his predecessor, Gross, who was very bearish and wrong at the 2003 stock market bottom.
Finally, we have Jim Rogers. Jim is one of the major reasons George Soros is as wealthy as he is. Jim is a hero of mine and perhaps the greatest investor of the three. He recently said in an interview that the current stock market rally is, “going to end terribly,” expressing the same concerns about the Fed-driven market that Gundlach has. I take Jim’s warnings very seriously. But he’s investing in China, commodities, precious metals and shorting equities and currencies around the world. He’s speaking to a different class of investor, technically called a global macro investor. He’s not talking to folks like you.
So we have three investment superstars, all roundly considered the smartest of the smart money, all expressing caution towards stocks. But what does this mean for the average individual investor?
Not much. If you were to sell your stock holdings every time the pundits, even the best ones, told you to you would miss the big declines but you would also miss most if not all of the gains. These guys are professionals and, for the most part, they are speaking to their fellow professionals. The vast majority of individuals, just like you, who have made the most money in the stock market are those who have simply socked away a regular amount of money every month and put it into stocks AND have been able to disregard the whirlwind of media madness. They allow the power of compound interest (Einstein called it “the most powerful force in the universe”) to work in their favor.
I have yet to meet the investor, amateur or professional, who has been able to sell at the top and buy at the bottom. So don’t even try it. Decide how much of your capital you feel comfortable committing to the stock market and then rebalance that figure on a regular basis, ideally quarterly. Then forget about all the noise. You will sleep better and you’ll make more money.
Chart of the Day
Dr. Copper (PhD in Economics) is not telling us much right now. This pennant formation is one we just have to watch. I’m interested to see which way it breaks and what the stock market is doing at the time. A confirmation or divergence may be a good tell.
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