A quick summary
- The stock market is climbing a "wall of worry".
- Unemployment is trending lower, but may reverse in the Fall.
- Earnings are improving, but they're based on lowered expectations.
- Inflation is rising from a very low base.
- Bond prices are taking a hit lately.
- Gold and TIPS are leading the way higher.
- An effective Covid vaccine is not yet in sight.
S&P 500 Returns by Decade Since 1900
Your success as an investor largely depends on three things: When you start, when you stop adding new money to your account, and how well you execute your plan. The chart below shows the decade-by-decade average returns for the S&P 500.
If you were fortunate enough to have started investing in the early 80's, you have probably done well. But, if you started in the early 2000's, it's been a bumpy ride.
This brings us to the decade of the 2020's. As you can see on the chart above, Mr. Market is a fickle chap. With the exception of the back-to-back winning decades of the 80's and 90's, every good decade has been followed by a bad one. That's mean reversion at work.
What's in store for us in this new decade? Based on what I've been reading, it looks like it will be a struggle to beat the 11.2% average gain we saw in the 2010's. Valuations are stretched. Covid is still with us. The Fed has pledged to keep rates near zero for as long as the eye can see, which doesn't bode well for retirees on a fixed income.
10 best performing stocks in August 2020
The below table is sorted by August performance. Most of these names have taken major hits from the pandemic shutdowns. We have the largest casino in Las Vegas, two cruise ship companies, a struggling airline, and a major hotel operator on the list. Don't rush out and buy these stocks without doing your due diligence.
The Triple Cross Indicator
The Triple Cross chart plots three moving average crossovers - short, intermediate, and long-term. The idea is to give you a sense of market momentum at these three time frames.
In a normal upward trending market, all three lines will be above zero. In a bear market they will be below zero. In between, the short moving average (red line) acts like the canary in the coal mine and warns of possible trouble ahead. This line is very twitchy, so only the boldest traders should act on it.
The intermediate moving average (black line) isn't as twitchy as the red line. It avoids some of the whipsaws that the red line can cause. When the black line moves above or below zero it's a good indication that the intermediate trend in the market has changed.
The long-term moving average (brown line) serves as confirmation that what the other two lines are saying is sustainable. Each investor must decide for themselves how to use the information provided by the three moving average crossovers.
This market rally now has confirmation from the long-term moving average crossover (brown line on the chart). Even if the market pulls back next week, the brown line will probably stay above zero (the green line) anyway.
The Minsky Chart (compression of daily volatility)
Lastly, we have the compression of daily market swings. Four months ago we were seeing daily swings of 6% to as high as 10% in the market. Now we're down to 1% or 2% daily swings with an occasional 3% day.
The blue lines are still compressing.
One thing is certain: this chart configuration will not continue to look like it does now for very much longer. Volatility will return, as it always does. Especially as election season begins to heat up.
(If you would like to know more about Minsky, and why I named this chart after him, see this report.)
Final Thoughts
I think the decade ahead of us will come in with ~5% average gains. Is that enough to get you to where you need to be, according to your plan?
While the technicals are looking better and better with each passing week, the fundamentals are not. And while the employment picture seems to be improving, the economy as a whole is still in a deep hole that will probably take several quarters to climb out of.
My advice is to take advantage of this rally but be prepared for setbacks and more volatility going forward.