Continue Buying

It’s now widely known that The Kelly Letter began buying into the weak market last Monday, following my March 16 advice to build positions gradually because nobody gets the exact bottom. The letter’s pick for a financial sector recovery is up 36% so far.

The overwhelming tone of recent emails is that the stock market is no place for money you want to keep, and that is usually a great buy signal. Readers have lamented the “insanity of this market” and the “utter detachment from reality” that recent news has exposed in the minds of some readers.

I don’t see any detachment. This is reality for the stock market. It has been volatile, but volatility is not an unusual characteristic for stocks. Moreover, it’s the key ingredient. When studies show that the S&P; 500 has returned a little over 10% per year over the long term, too many people take that to mean a smooth, consistent line rising at a pace of 10% per year.

That’s never been the case. Only one year, 1971 at +10.8%, had a return in the clean +10% area. The long-term average performance is the result of almost every year being above or below +10%, often by a lot. The annual trading range is around 24%. That means the average range from a year’s low point on the index to its high point is 24%, a wide berth.

Look at this handful of extreme annual returns:

1933 +47%
1995 +34%
1997 +31%
1989 +27%
1973 -17%
2002 -23%
1974 -30%
1931 -47%

As you can see, volatility is not new. It’s not special for our time. It’s no different this year than it was 77 years ago, when not one of us was involved.

Now, let’s come back to today. For all the nasty headlines and talk of the end of the financial system and calling of names at anybody who dares look for bargains and near hatred of the Federal Reserve, the S&P; 500 has lost a Great Depression worthy, widow and orphan killing, devastating, er hold on a sec, can this be right, 9.5%? Yes, so far this year, the S&P; 500 is down just 9.5%.

Even if we trace the current decline from the October high, the S&P; 500 is still down just 16%. That’s not even in bear market territory yet, which starts at -20%, much less the devastation zone, which to me starts at -30%.

For real devastation, we don’t have to look back far. Here’s how the S&P; 500 did in the tech burst:

2000 -10%
2001 -13%
2002 -23%

You think that was bad? Look at the Nasdaq:

2000 -39%
2001 -21%
2002 -32%

Anybody who invested and lived through that is scratching their head a little at the collective moaning taking place these days. If people are gnashing teeth and rending garments at -9.5% before the year is even 1/4 over, one has to wonder what they’re doing in this business.

One also has to wonder: Do people think the news was encouraging during previous bad times in market history? Do they think the Fed was not involved before? Do they think companies didn’t go bankrupt before? Do they think talk of the end of it all never happened before? We’ve seen all of what we’re seeing today. The market is a repeating pattern.

Bespoke Investment Group wrote on Thursday:

A whopping 44 of the last 90 trading days have been moves of 1% (+/-) or more in the S&P; 500. Fifteen of the last 90 trading days have been 2% days. While we’ve been constantly reading and hearing that the current period of volatility is unlike anything ever seen before, it isn’t. The number of 1% days reached 64 out of 90 back in October 2002, 56 out of 90 back in 1988, and 54 out of 90 back in 1974. And the 15 out of 90 that have been 2% days are nowhere near the highs reached during those periods either. The reason why so many people are so frantic about volatility is because it was extremely low preceding the current period. It was rare to see a 1% day from about 2004 to 2007, and 2% days were non-existent.

Welcome back to the norm.

Here at The Kelly Letter, we’ve done well through the recent volatility. Only two of our positions are down a worrying amount and I’m confident that each of them will recover for us, as I wrote to subscribers last week.

The permanent portfolios are down, but they’re designed to return twice as much as their indexes in both positive and negative directions, so it’s no surprise that they’re down. These last few months have been a great time to put money to work in Double The Dow and Maximum Midcap. People are going to be happy when those recover, and there’s no doubt that they will.

Fluctuation is what stocks do best. When they’ve fluctuated downward as much as they have, it’s time to buy. We’re at such a time and that’s why we’re buying.

Have a happy Easter Sunday!

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