Impending “Collapse”?

“Half-Time” 2021 Is Here

Call or email us today to schedule your personal half-time review.  We can schedule an in-person or online meeting-whichever you prefer.  This is a great time to review your personal investment risk level, make any adjustments to your personal financial goals, and update and adjust your personal long-term financial plan.  Call us today!

The “Impending Collapse”?

After a historic pandemic induced market drop followed by an unprecedented recovery, the media is now ablaze with the “next collapse,” citing plenty of financial professionals’ opinions. Some of these professionals even claim it will rival 1929’s collapse, which we previously spoken about as a non-possibility in our opinion. Many of the articles lazily say “nothing can go up forever” or pointing to “all-time highs” as a reason for concern. It should be noted that just in recent history, the S&P 500 has made repeated “all-time highs” since making its first post-financial crisis high in 2012, and it still continues doing so. The market only took six months to find its way to new highs during this most recent recession. In the entire history of the market, stocks have been making new highs since the indices began tracking them. But, in between those moments? Yes, markets do decline. Market pullbacks do happen as do recessions. We do not view this as a good reason to not invest.

Bull markets that have emerged from a bear market of at least a 30% decline have had strong returns in the first year. The rally that followed 2020’s bear market (a 34% decline) is no exception. The average increase in the six bull markets since WWII that followed a 30% or greater decline was 41% in the first year. It’s an impressive one-year return and is a reminder that bear markets usually end unexpectedly. Those who are safely in cash during the decline can find themselves chasing returns. (Source: LPL Financial Research)

The first-year increase of 75% from 2020’s bottom ranks as number 1, exceeding 2009’s second place return of 69%. On average, all the bull markets in question have been positive in year two, with an average return for the S&P 500 of 17%. However, year number two has not been without volatility, with an average pullback during the second year of 10%. Thus far, we have yet to see a meaningful pullback in the broader market indexes, but we are only three months into year two since last year’s market bottom.

Retail Investor Behavior

We do find comfort in our process of investing: buying stocks we believe to be undervalued. We see increasing concerns in retail investors’ behavior with the beloved “meme” stocks, such as AMC Theaters, GameStop and most recently NewEgg, that trade at absurd valuations that will be near impossible to grow to a point to justify current prices, in our opinion. Robinhood, an online trading platform primarily catering to the retail investor, recently released its trading revenue breakdown. Within this information, it was exposed that the lion’s share of their profits come from options trading. This is a concern for those retail investors that are simply trading options, which done alone is nothing more than gambling. When used properly, options can act as excellent risk management vehicles. However, when used entirely alone, it allows an investor to lever up and take on immense risk comparable only to putting it all on black in Vegas. Contrast this to pure stock investing that we do for clients; we are investing in actual ownership interests of businesses, not simply “betting” which direction the stock’s price will move. If the price declines, all else equal, we find the investment even more valuable. We do not see exposing this risk to our clients with these stocks, as we do not hold any of these positions. Aggressive and Growth clients did own a stock caught up in a similar situation and we were able to liquidate all of their holdings in Rocket Mortgage at higher prices.

Impossible to Value Lines of Code

Another area of concern to us is still “cryptocurrencies” that we see as an industry riddled with fraud and nearly zero consumer protections. Most of you may have heard of Bitcoin, however hundreds of other cryptocurrencies exist. Many of these exist to try and make transacting on various platforms “easier,” but it has evolved entirely into a FOMO (Fear Of Missing Out) experience with users buying these “assets” in hopes of prices going higher, not because of a belief the asset is undervalued. It is entirely possible that some of these could survive well into the future, however, we strongly believe the vast majority of these will end worthless. Many are touting these as “inflation hedges,” but we prefer focusing on stocks and real estate to achieve protections against rising costs and devaluing dollars. Contrasting cryptocurrencies to stock investing that we utilize for clients, we are investing in operating businesses that are generating cash flow for shareholders, which can be used to advance the business further or return capital to investors. Cryptocurrencies on the other hand, are simply pure speculation and believing someone will pay more than you did somewhere down the line. It’s not a bet we have any interest in making, as we cannot derive any real valuation from what is simply a line of computer code. As with meme stocks, our clients do not have any cryptocurrency exposure with us. We do see a risk for the markets as a whole if its adoption continues with larger financial organizations. If these positions fell to zero, it could be debilitating if these assets were used to back loans. It is a risk we will continue to monitor.

A Pullback Is Inevitable

As for a market collapse, we do not pride ourselves on trying to time market swings. Instead, we invest in companies that we believe to be undervalued and attractive investments for our clients. We do not doubt a pullback is in store at some point in the future, however we have no concern right now regarding a near-term recession. A “correction” of 10% or so is a normal occurrence. Keep in mind, when the Dow Jones Industrial Average drops a certain amount of “points” in a day, coming off a new high level, it may sound worse than it is as you have to account for the actual percentage drop. For example, if the Dow were to fall 10% off the current level of 34,421.93, the point drop would be 3,442.19.  The economy continues to show signs of strength and a healthy consumer. The yield curve, which is something we stay in tune with for signs of potential recessions, is normal and does not appear to be flattening and most likely will not until the Fed begins hiking rates again at some point in the future.  We will keep you posted.

We hope you and yours had a great July 4th Holiday!  We are here to serve and please don’t hesitate to call if you have any questions or if we can be of further service in any way.

God Bless,
Your TEAM at F.I.G. Financial Advisory Services, Inc.

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