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It Does Not Pay To Bet Against American Business

Friday, May 20th, 2022
It Does Not Pay To Bet Against American Business
It’s official. We’re in a bear market, a particularly savage one.

What should investors expect next? And, more importantly, what should they do now?

You can get a good sense of that by looking at the bear markets of the past.

There have been 21 bear markets going back to the 1920s.

The average bear market lasted about 300 days.

However, that’s just from the top to the bottom. The recovery generally takes a little longer.

Over the last 100 years, the U.S. market has taken an average of 3.1 years to battle back to the previous peak.

In other words, one year of decline followed by 2.1 years of recovery.

That wasn’t the case with the last bear market, of course.

The S&P 500 reached a record high on February 19, 2020, and fell to a bottom on March 23.

It was the fastest bear market in history, lasting a mere 33 days. And by late August, just five months later, the S&P had surpassed its previous high.

However, stocks sometimes take longer to recover. Much longer.

The bear market that began in 1973, for example, was among the worst.

Stocks didn’t recover for almost 12 years. No other market downturn in the last century took so long to heal.

Even during the financial crisis – the worst in the modern era – stocks staged a fairly speedy recovery.

By January 2013, the stock market’s dividend-adjusted level was back where it stood at the peak in October 2007.

The current bear market has already lasted longer than the one in 2020. No one knows how long it will continue.

However, in downturns the best investors put fresh money to work in great companies at better prices.

The second-best investors sit on their hands but at least remain invested – and reinvest their dividends if they don’t need the income.

And the worst investors?

They panic and sell. Or they don’t panic but sell anyway, rationalizing that they will get back in later when things look better.

You know, like they always do at the bottom. (I jest, of course.)

Part of doing the right thing is having the proper perspective.

If you invested to meet long-term goals, don’t let short-term events derail your plans.

How will you feel about this sell-off two years from now… five years from now… 10 years from now? Will you wish you had stuck with your plans or abandoned them? Will it look smart to have bought stocks that are cheap or to have sold stocks that are cheap?

The questions answer themselves.

It’s also important not to torment yourself with the day-to-day swings in the market.

Over the last few years, you may have enjoyed logging on to your brokerage account a few times a day to check your account value.

It feels good to make money, to see your net worth grow.

But what is the point of making yourself miserable by looking at a falling account value in a down market?

You should avoid that temptation.

It’s impossible not to feel emotional about the stock market from time to time.

But feeling emotional is one thing. Acting on it is another.

Fear, anxiety and regret do not generally lead to good investment decisions.

To the extent that you look at how much stocks have dropped, view them with an opportunity mindset.

In particular, don’t dwell on what your account is worth in a bear market relative to what it was worth at its peak.

After all, it would never have reached that level if you didn’t own equities.

And peaks are never visible except in hindsight.

If you stay invested – and continue to act wisely – your account will exceed the old peak in the next bull market.

Realize, too, that every market break of the last 200 years was a buying opportunity.

But only for those who acted on it.

As Warren Buffett often points out, it hasn’t paid to bet against American business for the past 246 years.

There’s no good reason to start now.

PEACE & BLESSINGS
Kenneth Reaves, Ph.D.

Don't Fight The FED!!!

Thursday, May 19th, 2022
Don't Fight The FED!!!

Don’t fight the FED!!!

You’ve probably heard this saying before.

For years, “not fighting the FED” meant “buying the dip” in stocks.

The idea was simple:

The FED had the market’s back… It was there to support the market during selloffs…

You could ride stocks to big profits as the FED injected more and more cash into the economy.

This was on full display during the COVID-19 crash. The FED pumped trillions of dollars into the market to keep it from crumbling... AND after crashing 36% in early 2020, the S&P 500 bottomed out quickly and came roaring back to gain 120% over 21 months.

And that’s just one example.

Since the 2008 global financial crisis, the FED has bought trillions of dollars’ worth of bonds, mortgages, and other assets to prop up the market. And the market’s climbed 500% since 2008 lows.

But now, “not fighting the FED” has a whole new meaning…

In March (2022), the world’s most important central bank raised its key interest rate for the first time since December 20, 2018.

Last Wednesday, the FED raised rates again, this time by 0.5%. That’s the largest rate hike in over two decades.

The FED’s also pulling liquidity out of financial markets and tightening its balance sheet.

A couple months ago, the FED stopped purchasing assets as part of its quantitative easing program, which it used to prop up the economy and markets during the COVID crash.

In short, the FED is no longer engaging in “easy money policies.”

It’s tightening.

And it’s doing so to combat inflation.

Inflation measures how quickly prices for everyday goods and services are rising.

Last month, inflation jumped 8.5% from the same period a year prior. That’s the highest reading in four decades!

It was also the fourth month in a row where inflation came in north of 7%.

Of course, inflation isn’t just hurting the purchasing power of everyday people…

It’s also eating away at people’s nest eggs.

Many investors are now scrambling to protect themselves.

I know because many friends and family have reached out to me.

They want to know how they can shield their wealth from inflation. They view cash as trash.

I get the logic behind this.

To truly generate profits from your investments, they must generate a return higher than the rate of inflation. Right now, that means making at least a 9% annual return.

That’s historically been doable in stocks. The average return of the S&P 500 since 1957 is just under 11%.

Many investors conclude they must own stocks in order to beat high inflation.

This conclusion is likely correct over longer periods of time. But right now, and for the next few months, it may be the wrong move to hold too many stocks. Because…

The FED is waging a war on inflation…

You see, interest rates are the cost of money.

When they rise, it becomes more expensive to borrow money.

This makes it harder for most people to buy homes, cars, and anything on credit.

In other words, the FED is trying to crush consumer demand, which will cause inflation to fall.

So far, it’s working…

According to the Mortgage Bankers Association, mortgage applications dropped 8% for the week ending April 22, hitting the lowest rate in three years. There were 70% less refinance applications than there were in April 2021.

The FED’s war on inflation is likely far from over…

Last week after the FED's meeting, Chairman Jerome Powell said, “inflation is much too high.”

In other words, YOU, ME, WE the ATWWI FAMILY can expect more rate hikes in the coming months. In fact, the market has already priced in 0.5% rate hikes for June and July.

No worries, because we will continue to get "P.A.I.D." utilizing our adaptable ATWWI strategies and techinques.

PEACE & BLESSINGS
Kenneth Reaves, Ph.D.

Dividend Stocks Provide Protection From the Bear Market

Wednesday, May 18th, 2022
Dividend Stocks Provide Protection From the Bear Market

The market has been brutal in 2022, especially over the past couple of months.

The S&P 500 is down 16%, while the Nasdaq Composite has fared even worse, falling 25%.

But there’s been an investment that provides "PROTECTION".

"DIVIDEND" stocks have given YOU, ME, WE the ATWWI FAMILY "PROTECTION" from the raging storm. 

In the January (2022) I discussed why I expected "VALUE" stocks – particularly "DIVIDEND" stocks – to outperform this year (2022).

And outperform they have!!!

The iShares Core High Dividend ETF (HDV) is up 4% year to date. The top three holdings of this exchange-traded fund (ETF) are Exxon Mobil (XOM), Johnson & Johnson (JNJ) and Verizon Communications (VZ).

The SPDR Portfolio S&P 500 High Dividend ETF (SPYD) is also in positive territory, up 2.8%. This ETF lists Seagate Technology (STX), ConocoPhillips (COP) and Iron Mountain (IRM) as its top holdings.

Also, the WisdomTree U.S. High Dividend Fund (DHS) has gained 4.6% year to date. Its top three holdings are Philip Morris International (PM), Altria Group (MO) and AbbVie (ABBV).

It shouldn’t be a surprise that stocks that pay strong dividends not only are outperforming the market but are still positive for the year, despite the market being quite weak.

The dividends received act as a buffer. If you’re collecting a 5% dividend yield and the stock falls 5%, you will break even. So when markets are bad, dividends can offset some of those losses.

But the markets are currently down far more than 5%, so it’s not just the dividends that have led to positive returns. These stocks are actually going up in price despite the poor overall market.

Entering this year (2022), dividend stocks were dirt-cheap. Everyone was focused on growth stocks and finding the next Tesla (TSLA), bidding growth stocks up to ridiculous levels and ignoring more mature companies with loads of cash flow.

As markets tumbled, high-flying growth stocks had much further to fall than value stocks.

My strategy over the past few years has been to load up on low-valuation dividend stocks, especially those with solid starting yields and strong dividend growth.

That has led to my stock portfolio being positive year to date and my portfolio beating the market by at least 27 percentage points – in a year when the S&P 500 is down 16%.

ATWWI FAMILY members who are focusing on long-term investments, should use the recent sell-off to accumulate your favorite dividend payers cheaply, if they have, in fact, gone down. While most stocks did, dividend payers did their job and provided "PROTECTION" for ATWWI FAMILY members who would otherwise be drowning in losses.

PEACE & BLESSINGS
Kenneth Reaves, Ph.D.

Positioning Your Portfolio for Higher Interest Rates

Tuesday, May 17th, 2022
Positioning Your Portfolio for Higher Interest Rates

The abysmal start to the year continues. Year-to-date, the only sectors in positive territory are energy (+44.9%) and utilities (+1.9%).

At the other end of the scale, technology, communication services, and consumer discretionary sectors are all down at least 20% YTD.

The performance of utilities this year may be surprising, because utilities are one of the sectors that generally underperforms as interest rates are rising. However, the markets are always forward-looking. It was well-known in 2021 that interest rates were bound to rise, and utilities underperformed last year. Now that interest rates are actually moving higher, that news is priced in and the markets are looking toward the next phase of the business cycle.

The Business Cycle

A typical business cycle has four phases that reflect different fluctuations of the economy: early cycle, mid-cycle, late-cycle, and recession.

The early cycle phase marks a strong recovery from a recession. Monetary policy is eased, and sales and margins expand.

During the mid-cycle, the economy experiences moderate growth. Profits are healthy, and monetary policy is fairly neutral. The stock market usually experiences consistent growth during this phase.

During the late-cycle, economic growth rates start to slow as credit tightens. This is the phase that we appear to have entered. The transition into this phase can result in increased stock market volatility.

The final phase doesn’t always happen, but the recession phase is much more likely with high energy prices. Economic growth contracts during the recession phase.

Although my strategy is always to remain fully diversified at all times, some investors may try to time the business cycle. Different sectors historically perform differently during the different cycles. So it pays to overstand/understand what is likely to perform best in the late-cycle and in the possible recession to come.

Three sectors have historically held up well during a recession: utilities, health care, and consumer staples. These sectors are of considerable interest during the late business cycle. Not only do they generally outperform during this phase, but they are consistent outperformers during the recession phase. If the current business cycle follows the typical pattern, then we are entering a period where these sectors are likely to outperform the broader markets for a period of several years.

If you are concerned about recession, but have a long time horizon, you might consider accumulating those sectors that tend to do well both during the late cycle and during a recession. Given the lofty valuations of energy stocks, it may make sense to move some of those energy profits into utilities, consumer staples, and health care.

How do they do it? Because simply put, there is no substitute for what they sell.

Everyone buys it, even when money is tight. Including YOU, ME, WE the ATWWI FAMILY. You might cancel that tropical vacation, but you're not going to stop paying for THIS. That nonstop demand is exactly why they’re kicking the tar out of regular stocks. In fact, since early 2000 they have beaten the S&P 500 by 1,428 points… and routinely produce income that crushes inflation…

PEACE & BLESSINGS,
Kenneth Reaves, Ph.D.

Monetize "Mr. Market" When He Gets Emotional

Monday, May 16th, 2022

Monetize "Mr. Market" When He Gets Emotional

In his 1987 letter to shareholders of Berkshire Hathaway (BRK-A), Warren Buffett imparted an allegory from his mentor Benjamin Graham that every investor should hear – especially today.
According to Graham, you should imagine that an accommodating chap named "Mr. Market" delivers you the various daily stock price quotations you receive on a day-to-day basis.
He is a reliable fellow, Mr. Market.
Without fail, he appears every single day and names a price at which he will either buy your security or sell you his.
But Mr. Market suffers from incurable emotional instability.
While he is calm most of time, he goes through periodic fits of euphoria and depression.
When Mr. Market feels euphoric, he can see only the good in a stock and he is willing to pay an overoptimistic price for it.
When Mr. Market is euphoric, we can take advantage of him by selling him our stock.
At other times, though, Mr. Market gets depressed and he can see nothing but trouble ahead for both that stock and the world.
On these occasions, Mr. Market will name a very low price for the stock.
He becomes desperate to sell.


YOU, ME, WE the ATWWI FAMILY, exploit Mr. Market at both ends of his emotional spectrum as buyers and as sellers.
Don’t feel guilty about doing it – Mr. Market isn’t a real person.

EXAMPLE:
A little over a year ago, Mr. Market wanted no part of Texas-based utility Vistra Corp. (VST).
What happened was the blizzard-induced “Great Texas Blackout,” one of the worst power outages in American history.
Residents went without power and potable water for several days.
It was a once-in-100-years event – a freak occurrence.
During the blizzard, more than 3,000 daily low temperature records were set as a deep freeze covered the United States.

Vistra Corp (VST), which provides and distributes electricity to the Texan market, got hit hard financially.
When the company told investors that it would be taking a one-time loss in the range of $900 million to $1.3 billion because of the historic blackout, our emotional friend Mr. Market was distraught at the news.
He was immediately willing to sell us his Vistra shares for 30% less than he was prior to this announcement.
I called this response by Mr. Market a “Texas-sized overreaction.”
Vistra Corp's (VST) balance sheet could clearly handle the one-time loss.
Furthermore, management also laid out measures that it would take to avoid another such loss happening should we for some reason get another once-in-a-century blackout event.

For those reasons, I felt Vistra Corp (VST) was a safe company to own.
Equally important, I was certain Vistra shares were dirt-cheap.
At Vistra Corp's (VST) $8.13 billion market valuation at the time, I was buying a company that had annually generated almost $2.5 billion in free cash flow.
That means Vistra Corp (VST) was selling for an absurdly cheap 30% free cash flow yield. (My math: $2.5 billion / $8.13 billion = 30%.)
Free cash flow is what matters to me as an investor.
Free cash flow is the cash that a company has available to pay to shareholders a dividend, use for share repurchases, invest in earnings growth or strengthen the corporate balance sheet.
With a 30%-plus free cash flow yield, Vistra Corp (VST) could repurchase all of its outstanding shares in three years or pay an annual 30% dividend to shareholders.
If the massive free cash flow yield wasn’t a convincing enough reason to buy Vistra Corp (VST), I also pointed to the fact that recent takeover transactions of similar companies pointed to Vistra Corp (VST) being worth more than double the stock’s trading price.
Vistra Corp (VST) was a gift that an emotional Mr. Market served up to us. And his gift has been an incredible one.
Since Mr. Market’s episode last year (2021), Vistra Corp's (VST) shares have gone up more than 50% and have soundly trounced a now struggling S&P 500.

PEACE & BLESSINGS
Kenneth Reaves, Ph.D.

 

The Ask The Wiz Wealth Institute is not an investment advisor. We strive to be educational and informative community servants.
 

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