Keep Buying The Dips

I wrote on Nov. 6:

If you’ve been waiting for a pullback to put more money to work, now’s your chance. We may get a little more short-term downside, but in general we’re in an upward-moving market and you should be buying. Even if you don’t buy something, though, at least remain firmly invested. Do not get scared out of the market by talk of recession.

That proved prescient. The upcoming gridlock in Washington sent the market higher last week:

Dow ……………. 12,108 +1.0%
Nasdaq …………. 2,390 +2.5%
Nasdaq 100 ……… 1,751 +2.8%
S&P; 500 ………… 1,381 +1.3%
S&P; Midcap 400 ….. 792 +2.1%
S&P; Smallcap 600 … 392 +2.1%

The Kelly Letter’s unique permanent portfolios are riding the trend. So far this year:

Double The Dow ….. +22.6%
Maximum Midcap ….. +9.0%

This performance is not unusual, either. Look how well these portfolios have done since I began them at the end of 2002, particularly Maximum Midcap. It hasn’t had a down year yet. I realize that the time period is not very long, but the principles on which I built the portfolios go back more than 100 years.

To understand how very well Maximum Midcap is doing, consider that if at the end of 2002 you’d invested $10,000 in a Dow index fund, you’d have $14,393 as of last Friday. If instead you’d put that $10,000 into Maximum Midcap, you’d have $26,622 as of last Friday. That’s not bad for a strategy that basically runs on autopilot.

Every time I present these portfolios at conferences, I’m ridiculed. “Can’t last,” my critics say. “Back-testing isn’t valid,” say others. I show them the charts, the price histories, and explain the theory behind the portfolios, but they can’t accept that the approach simply works over the long run. As you can see from the data provided above, they’ve worked pretty well in the short run, too!

I think the reason my critics doubt these portfolios is that following them is too simple. There’s no trading. No second-guessing which way the market is going. No split-second decisions. All of the headache of the stock market goes away because you simply do what the strategies say to do, and it’s the same thing month after month.

If you’d like to take a look at what we’re up to with these permanent portfolios, along with my current individual stock picks, please try The Kelly Letter. It’s just a penny for the first month, and you can cancel if you don’t want to continue receiving it. If you do want to continue, as 85% of all people who try it do, I’ll charge you just $5.48 per month. Plus, you can cancel at any time, although odds are you won’t. It’s cheap, honest, and useful, and there’s nothing else like it in the world of investment advice.

Speaking of investment advice, let’s take a look at the market.

There’s a lot of talk about recession. Skeptics on the U.S. economy point to Q3’s sickly 1.6% GDP growth as evidence of weakness, highlighting that it was the most tepid we’ve seen in three years. The ever-present housing market slowdown argument is still, well, present. A third sign that the economy is in trouble comes from the inverted Treasury yield curve.

How, then, can stocks have come so far since August?

Their strength is from what always drives stocks in the end: earnings. I expected earlier in the year that we would see a slowdown to single-digit corporate earnings in the second half, but we haven’t. Four-fifths of companies in the S&P; 500 have already reported, and the aggregate came in with double digits for the 17th quarter in a row. Looking ahead, most companies and analysts are forecasting a continuation of that trend.

It’s hard to recede when you’re advancing so briskly, so a recession looks unlikely. In fact, because earnings have been so strong, stock valuations have actually come down as the market has risen. You pay less for a dollar of earnings today than you did a year ago, even two years ago.

About housing, none other than former Fed Chairman Alan Greenspan said last Monday that it may not worsen and that it is no longer subtracting from growth. He also said, “The economy is obviously going through a significant slowing period, which as best I can tell is more than likely temporary.”

Now, this recession talk has been with us for some time, but the new twist last week was that the fresh Democratic leadership is going to kill the economy by taking profits out of healthcare, cutting military spending, enacting environmental regulations that curb profits, and raising high-income tax rates.

Don’t pay attention to any of that. Much as Republicans like to be thought of as the pro-business party, Democrats have the better track record when it comes to economic and market performance while in office. They need money as much as Republicans do. They have corporate backers, just like Republicans do. One of the finest financial writers in history, Andrew Tobias, is treasurer of the Democratic Party. Nobody in politics, whether Democrat or Republican, wants recession or a plunging stock market.

Indeed, a little less military spending could be just what this country needs. It might create fewer weapons needing to be used somewhere to start a directionless war that ends up sucking $1 billion a day out of the country’s coffers.

In general, my view is that politics don’t matter much to the stock market. Wall Street just wants to be left alone by Washington (don’t we all?), and that’s why gridlock is the preferred status. We have gridlock.

There’s a final point to add to the market outlook. So far in November, each day has seen roughly 200 new highs on the NYSE with occasional spikes above 300. That’s a lot of momentum providing support. New highs make headlines and headlines draw money into the market.

So, I reiterate what I wrote last week. Ignore the talk of recession. Focus on earnings, which are good. Ignore the worries about Democrats cratering the economy. First, they won’t and, second, Washington is gridlocked, which is good. Finally, the market’s healthy underlying tone marked by a plethora of new highs should keep the bull running.

Short-term downdrafts are a distinct possibility. Buy into them. The longer-term trend is up.

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