Peter Lynch said, “If you cannot convince yourself ‘When I’m down 25 percent, I’m a buyer’ and banish forever the fatal thought ‘When I’m down 25 percent, I’m a seller’ then you’ll never make a decent profit in stocks”.1 Lynch was one of the greatest investors of all time. He was, of course, talking about a single stock, not an entire portfolio. But in a concentrated portfolio, a stock down 25% can drag down the short-term performance.

For the first quarter, I expect that the total of my client portfolios will be roughly flat. That is after a 77% gain in 2020 and 40% gain in 2019. None of the stocks in client portfolios is down 25%. It is a general leveling off. Of course, I always have to say that past performance is no guarantee of future performance.

Am I concerned? No. Not at all.

I believe client portfolios are well positioned for an expanding economy, and I do expect to see the general stock market resume the same increases we have seen for the last eleven years. From the bottom in the first quarter of 2009 until the end of 2020, the S&P 500TR had increased an average of 16% compounded annually. This reminds me of the of the market only a few decades ago, when it hit bottom in 1979 and found the top in 2000, compounding S&P 500 17% annually in that time. That is not different from the 17% annual compounded growth from the 1979 bottom to the 2000 top.

There are so-called “gurus” saying the rate of growth is going to slow down or even become negative. But that has been true almost from the time this secular bull began in 2009.

Ed Easterling was interviewed for an InvestmentNews article, and in it called a guru. “The market has made new highs recently, but the secular bear market that began in 2000 isn’t over, according to Ed Easterling, president of Crestmont Holdings LLC, and a guru of long-term market cycles.

“In a recent update to his popular research, he said that as of the end of March, the S&P 500 traded at a 22.4 price-earnings ratio using his 10-year normalized measure, a level that is fully valued given low inflation.”

Later, the article continues, “Secular bull markets usually begin with a normalized P/E of about 10 or less, he said. “The market will probably chop around” from here, Mr. Easterling said. “It doesn’t have to go down 50%.”

“The market can stay here [at this same level] another decade while earnings come up and valuations move down, Mr. Easterling said.”2

Did I mention that article from Investment News was written in 2013, eight years ago when the DOW Jones stood at 15,000? It is now over 33,000. Guess it did not stay at that same 15,000 level for a decade.

Investment News produced another article which featured a “guru’s” advice saying, “Stock market returns over the next several years are unlikely to be better than 5% per year,” claims David Swensen, who manages Yale’s Endowment fund.”3 That was in November 2017, over three years ago. I remember well. A prospect who would become a client told me that his financial advisor had related Swensen’s words. Fortunately, that prospect chose not to believe the financial advisor and instead move the account.

So how accurate was Swensen’s prediction? The S&P with dividends reinvested for the last three years have been:

2018 -4.4%

2019 31.5%

2020 16.3%

For a year it looked like Swensen could be right. But after 2018 he was way off actual returns.

My take is this: We are in a secular bull market that is being driven by the world wide GDP growing at a higher than average rate, and this growth is going to continue for the rest of the 2020s and maybe into the early ‘30s. There will be corrections and setbacks and even some short-term bear markets.

If I am right about how this will end – in a bout of inflation like the 1960s and 1970s – then now is a time to build a margin of safety in portfolios. By that, I mean it is necessary to build wealth to two or three times what you would plan in a tame inflation environment. We are already seeing the “cost push” type of inflation slowly pick up with wages and commodity prices increasing. Wages are now growing at five percent annually. The new focus on labor unions will only strengthen increased wage demands. Commodity prices are also increasing.

Inflation is not like the pandemic, which strikes quickly in a period of months and can be dismissed in a year or two. Inflation as I describe increases moderately each year and continues to increase for decades until reaching double digits annual percentage increases. The recovery in purchasing power can take decades. It took over 30 years for the DOW to recover, in real terms, from the 1960s-70s inflation. This should be especially concerning for current retirees or those close to retirement. It is especially true for older people who may not have 40 or 50 years to recover.

Now is the time to prepare. Now is the time to build portfolio values. “HE WHO HESITATES IS LOST – Swift and resolute action leads to success; self-doubt is a prelude to disaster,” Cato famously said.

A. Michael Adams
President & CEO

[1] Lynch, Peter, and John Rothchild. One up on Wall Street: How to Use What You Already Know to Make Money in the Market. Norwalk, CT: Easton Press, 2003.

[2] Jamieson, D. “Guru: Secular Bear Market Isn’t Over.” InvestmentNews, May 5, 2013.

[3] “Smart Money Says Temper Expectations of Stock Returns.” InvestmentNews, November 25, 2017.