Last week, the Nasdaq dropped 3.8%. That was the tech-heavy index’s seventh straight week of declines.
Tech stock investors haven’t had a losing streak this long since 2001 after the dot-com bubble burst.
And tech isn’t the only sector feeling the pain.
The S&P 500 tracks the 500 largest U.S. stocks by market value. On Friday, it briefly dipped into bear market territory (technically, a 20% or more fall from a peak) before rallying at the end of the day.
In short, it’s ugly out there.
If you’re like thousands of Daily Cut readers… and you started investing during the pandemic… this is your first major pullback.
Even if you’re a more seasoned investor, it’s still the worst plunge since the 2008 global financial crisis.
So this week, I’ll continue to spotlight the moves you can make now to protect and grow your wealth.
Most mainstream investors don’t know it… but the best time to invest is when nobody else wants to.
Before we get to that, you need to understand something important about bear markets.
As colleague Teeka Tiwari has been writing about, there are two different types of bear markets.
“Secular” bear markets are long-term downtrends. They generally last between 12 and 20 years.
“Cyclical” bear markets are shorter-term downtrends within secular bull markets. They generally last between 6 and 18 months. Then the longer-term bull trend takes over again.
Bull markets are the same – either secular or cyclical.
The last secular bull market lasted from 1982 to 2000. During this time, we saw three major declines. They were the 1987 Black Monday crash, the 1989 junk bond market crash, and a recession from 1990 to 1991.
But each of those was a cyclical – or short-term – bear market within a larger, long-term bull market. So they weren’t times to sell out of stocks and move to cash.
And Teeka says we’re seeing something similar today.
You can see how it played out in this chart…
Between 1982 and 2000, the S&P 500 logged a total return of 397%.
But to earn that return, you had to stay the course through three major cyclical bear declines.
These took the S&P 500 down 19%… 19%… and 33%.
Those 19% drops didn’t quite make the official definition of a bear market. But they’re close enough to count.
It began in 2014. That’s when the S&P 500 surpassed the high of the 1982-to-2000 secular bull market.
Counting the current drawdown, we’ve already had three cyclical bear or near-bear markets within that longer-term uptrend. You can see this in the chart below.
The first was at the end of 2018. That’s the last time the Fed began raising interest rates. And the S&P 500 dropped 19.8% before reaching new highs.
Then we got the pandemic-induced cyclical bear market. It raged between February and March 2020. Over that time, the S&P 500 plunged 32% before reaching new highs.
Both times, folks who panicked over the short term lost out on long-term gains.
Had you simply bought an S&P 500 tracker fund at the start of 2014 and held until today, you’d have a total return of 148%.
Teeka says the same thing is true today. Folks who resist the temptation to panic sell… and hold on to their stocks… are poised for gains when the bullish trend resumes.
It’s largely down to something called the M/Y ratio.
It’s the ratio of the number of middle-aged folks (35 to 49 years old) – the “M” – to the number of young adults (20 to 34 years old) – the “Y.”
When there are more middle-aged people than young adults in the population, Teeka calls it the Golden Ratio.
The last two times it’s been in effect were from 1950 to 1965… and from 1982 to 2000.
And as you can see from the above chart, the last two times this ratio kicked in (grey shaded areas) the S&P 500 shot up 455% and 976%.
Now we’re back in a Golden Ratio period. And demographic trends show it’s set to last until at least 2028.
Folks in their late 30s and 40s generally have higher salaries than younger folks. So they tend to have more discretionary income.
These folks also often have young families. So they need to spend more on average than young adults.
And middle-aged people are typically saving for their retirements and investing more in the stock market than young adults are.
All these factors boost stock prices. Here’s Teeka…
Few analysts keep a close eye on the Golden Ratio like I do. You have to study academic papers to find in-depth research on it.
When the Golden Ratio is in play, the economy tends to grow faster, corporations profit more, and the stock market rises faster. This was true in the last secular bull market. And this Golden Ratio period is set to last until 2028.
Folks in the mainstream are panicking about the recent sell-offs. I’m not as concerned. These demographic trends point to stock prices going up. The Golden Ratio says this bull market has another six years to run.
It involves doing the opposite of what most mainstream investors are doing. Teeka again…
I know this market sell-off is painful. But if you want to emerge from this bear market richer, you have to view it as a gift.
It may seem counterintuitive when there’s a sea of red everywhere. But you must treat it as a fire sale.
The key is to pick investments backed by powerful megatrends that can make it through this cyclical bear market.
As I mentioned up top, the best time to invest is when nobody wants to. And we’re in one of those times right now.
But if you understand that we’re in a cyclical bear market, not a secular one, you know there’s no reason to panic. Instead, you can focus on picking up quality investments at low prices.
And our analysts have been working hard to identify the best of these opportunities.
More on that later this week.
Until tomorrow,
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Chris Lowe
May 23, 2022