The Kelly Letter Goes All In to Stocks

The Kelly Letter goes all-in to stocks, inflation is stabilizing, and past stock-market declines like this one led to solid recoveries.

After the S&P 500 fell 20.6% in the first quarter, its worst first-half since 1970, The Kelly Letter went all-in yesterday.

Stock/bond allocations per plan:

100/0 in 3Sig
94/6 in 6Sig
96/4 in 9Sig

If you have a bottom-buying account, now’s the time to use it.

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The core of the bearish argument is this:

The near term will bring two things—higher interest rates and lower earnings—and both will be bad for stocks.

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But bad news isn’t really news anymore.

Sentiment has been in the dumps for months.

What would be noteworthy? Good news.

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Inflation looks to be stabilizing.

May CPI grew 8.6% on-year, above expectations and soul-crushing to believers in March’s peak inflation idea. But it was only a tad higher than March’s 8.5%. Sideways for three months is a sign of stabilization, not worsening, and global supply chain pressure is declining.

The New York Fed’s Global Supply Chain Pressure Index remains well above its prepandemic level of zero, but is down to 2.9 from 4.4 in December.

With interest rates rising and supply chain pressures declining, it’s reasonable to expect inflation to abate in the second half.

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Three studies suggest recovery ahead:

1. Buyers into bear markets usually have a good 12 months ahead.
2. First-half declines like this year’s usually lead to good second halves.
3. The third year of a president’s term is usually the strongest.

I can’t emphasize enough: The Kelly Letter didn’t buy yesterday because of these studies, in a bid to time the bottom. Rather, its plans were designed from the long arc of history, which shows that buying low prices produces solid returns, and the plans run a formula each quarter to determine if the quarter’s price change signals a buy or a sell—based only on what happened in the quarter, not on a guess about the future.

Even so, it helps to revisit historical studies confirming the wisdom of buying into low price phases, when news is always bad and the mood gloomy.

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This is The Kelly Letter Podcast. I’m Jason Kelly.

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