Stock market permabears forever warn about a crash, and for good reason. It makes for reliable marketing because the stock market declines multiple times per year, on average. Soon after making their predictions, the permabears can often say they told us so.
What they leave out is that their advice costs investors who follow them gobs of money. Yes, the stock market goes down sometimes, but it comes back and nets out to a positive result. It doesn’t matter when stock prices will rise and fall next, just that you react rationally, in a predefined manner, to what they do.
Hello, I’m Jason Kelly. Thank you for watching!
Is the stock market about to crash?
Well, the usual chorus of permabears thinks so, and with a new president on the way and interest rates having gone up last month, many investors are nervous.
Now, some background here: Last year, the S&P 500 gained 12%, a good year despite the permabears saying the whole time that it’s going to go down. Remember, we had a rough January and then they said that’s never a good sign, then we had the Brexit fears, and then we had the US election, right?
But last month, on December 14, the Fed raised its key interest rate by 0.25% to a range of 0.50% to 0.75%. Which was only the second time in a decade.
Now, the permabears, of course, say everything is sliding into the mud. That’s what they always do, right? But Fed Chairwoman Janet Yellen said this: “Economic growth has picked up since the middle of the year. We expect the economy will continue to perform well.”
OK, well that sounds pretty good.
Now, how had stocks done up to the Fed’s announcement? Very well. Here’s the S&P SmallCap 600 via the IJR ETF, one of my favorites. Look at that. Steady climb higher over the year, and a rocket shot up from the beginning of November, right?
Now, the day after the Fed’s announcement, David Stockman went on Fox Business and said that President-Elect Donald Trump, Donald Trump, must oust Yellen on his first day in office.
Now, who’s David Stockman? Take a look.
He’s the former director of the Office of Management and Budget in the Reagan Administration, now a permabear pundit. His career resume conveys too much authority for a man whose stock market commentary has cost investors enormous profit.
I mean, just look at his post-Fed-rate-increase view on Fox.
He said Yellen has “no clue that this is a massive bubble,” complained about a giant rise in small-cap stocks, and claimed the “Fed has created massive distortions, total mispricing in bonds and stock markets. Very unstable bubble everywhere.”
Now, higher markets are only a “mispricing” to him and other permabears who’ve missed their rise. To those of us who’ve owned this 8-year-old bull market, there’s nothing amiss at all.
I mean, if rising prices are Janet Yellen’s fault, let’s keep her a while longer, shall we?
She’s been chair of the Fed for just two years. Before her, Ben Bernanke [was the chair, and] Stockman accused him of distorting markets for the first six years of the current bull market.
This is the same David Stockman who warned last February that bulls would get slaughtered, watched stocks rise like mad after that, then said on CNBC in early November that investors should sell everything.
That was the very bottom. He was wrong in February, wrong in November, and wrong again in December. Now, here’s that IJR chart extended through January 6th, [with Stockman’s warnings highlighted.]
He’s a contrary indicator, telling investors to sell stocks just when they should be buying, and then reiterating that warning forever until it will one day come true.
Meanwhile, the more the market rises after he warns investors away from it, the more dangerous he claims it’s becoming.
He will repeat his warnings until the market inevitably turns down one day, then he’ll say he told us so.
He’ll keep sidelining investors who should have been profiting off this run. After they’ve missed everything and the market takes a dip, he’ll announce that he foresaw the whole thing.
For more on Stockman’s antics, see my installment after his “sell everything” warning in November. It’s linked in the description below.
It’s not just Stockman, of course, it’s all the permabears. They’re engaged in a game of marketing, not forecasting. They scare investors into paying attention. It’s not about helping people profit. It’s about frightening them into handing over money for management services or something related.
They’re clever to predict declines. Why? Because declines appear regularly along the long-term march higher. They’re a normal part of the stock market, not some catastrophe to be fretted over.
Ben Carlson, writing at awealthofcommonsense.com, researched the frequency of market declines. In his January 8th article, “How Market Crashes Happen,” he reported the average frequencies of declines in the S&P 500 from 1928 to 2016:
Have a look at this. Here’s his four-bullet list:
5% losses happen 3 times a year, about.
10% losses once a year.
15% losses once every 2 yrs.
20% loss once every 3-4 yrs.
These are averages, of course. Declines don’t happen on a schedule, but this is instructive in showing that they are inevitable and not rare — and not catastrophic.
The regularity of normal stock market setbacks is what powers permabear marketing. They know that they’ll eventually have a chance to say, “I told you so.”
Now, don’t let them fool you away from powerful stock market profits. Manage your money with rational price reaction only.
Of course markets will decline periodically. Don’t lose sleep trying to avoid the declines, and failing to avoid them. Instead, expect them and build a rational reaction to them into your money management plan.
That’s what I do. It works without any stress from indecision.
In 2016, while David Stockman’s followers made zero sitting in cash on the sidelines, the Kelly Letter subscribers gained 18.9%. I’m proud of that: 58% more than the S&P 500’s 12% gain, simply by following the letter’s predefined plan of price reaction.
Eventually, smart investors realize that this business is just about a moving price line. It doesn’t matter why, when, or where the line moves, only how your money reacts to where it did move.
Forecasting is completely pointless and, more important, unnecessary. All you need is price movement in both directions, up and down, and the right reaction to it, to make money in stocks.
Notice: You need price movement. It’s a condition of the stock market to be used, not feared.
Above all else, ignore the forecasters! They don’t know what’s coming, and it doesn’t matter anyway.
Alright. Thank you for watching. Have a great week!
For more on Stockman, see How David Stockman Got the 2016 Stock Market Wrong.
For more punditry gone wrong, see the Stock Market Forecasts page.
To see the performance of rational reaction the way I do it, please visit my Strategies page.
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I have some really super-smart friends who, um, are lost perma-bears. I get email links each week to old white guys with their masterful arguments of doom. Like, 8 years of it. It’s just so addicting for some people. I feel bad for them!
Something that his me a bit worried is that the fed sandbagged raising rates for years, and now are starting to raise — now that HRC lost. It would make perfect sense that they would love to see the market crash under trump. I can see the headlines and statistics now on CNN. The funny thing is, Trump is smart enough to expose their games, and people won’t buy it.
It will be interesting. Thanks for your writeups as always.
You’re welcome, Scott.
I think we all know smart permabears. They’re almost always smart, and overthink everything. They see risks in every direction, and think it shows intelligence to identify all of them. What they miss is that most of them never matter, and they mistakenly think it’s naive to ignore the bulk of risks in pursuit of higher returns.
The best investor would be one just smart enough to start a sensible plan, but not so smart they felt the need to meddle with it and second-guess it for the following several decades.
Brilliant overthinkers end up in cash, guaranteed to lose.
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