Buckle Up

“The road ahead may be bumpy, but our destination is serene and secure. So fasten your seatbelt, hang on through the bumps”

                                                                                                - Russell Nelson

We were millimeters away from having thirty percent plus declines in financial markets and an astonishingly dystopian reality that we likely averted the beginnings of a civil war…

And what was the market’s immediate response?  Apathy. Markets amazingly went up..  

Perhaps the assassination attempt on Donald Trump was the crescendo of what was already a very tense political environment: democrats scrambling to decide if Biden was their candidate after a debate which made clear to the broader public that he was in fact an eighty-one-year-old man who has lost some cognition.  This, along with the implosion of Trump’s endless lawsuits - signs that things are moving in a direction that portends a strong possibility of another Trump presidency.  

Or maybe just the beginning of more troubling inflammatory political rhetoric and it’s ugly twin – violence, down the road.  I hope not..

On the economic front:  numbingly high prices for companies with Artificial Intelligence (AI) as part of their either real or perceived future revenue stream.  This added to an already troubling divergence in financial markets valuations that left any companies that were not among the ten names heard most frequently on the nightly news in garbage dumpsters in the mind of investors.  Then we have the cumulative effect of inflation in grocery stores and housing affordability as well as record deficits that we have become numbingly accustomed to – and with them the baggage of future massive tax burdens.  

That’s all (wink)…   And none of these things will be going away in the next four months!

Me thinks we are in uncharted waters – at least until Nov 5, 2024 and maybe not until Jan 20th, 2025, when the person we elect to be our next president should be inaugurated.

How to navigate these next four to six months as an investor will be a challenge.

As I write this newsletter we are in the midst of either a large “head-fake” or possibly the almost decade-overdue change in financial market leadership which could make the AI leaders fade into price oblivion.  Or maybe not…   

Regardless, valuations matter and eventually investors or their advisor representatives will come to the conclusion that $1 in actual earnings is worth more than $.25 of unfulfilled hype as they have in similar situations in the past.  The last time markets needed this kind of reality check was early in my career (which started in 1995).  In my enthusiasm as a young advisor to be a part of the DOT COM and tech company coronation my young, inexperienced self found a way to lose way too much buying into the hype.  I won’t forget.   

Let’s review what happened then and now:  From May of 1995 (when I started) to the end of the decade and millennium (1999) the S&P 500 outperformed small, inexpensive companies (known as Small Cap Value or SCV) by 11% PER YEAR over 4.5 years!   By comparison – large companies have outperformed SCV by 14% over the last year and half – or 4.5% annually since I started Pillar Capital in April of 2010.  Similar in some ways but less acute than the previous 4.5 year period.

During the previous time – within two years the 11% annual advantage for the S&P 500 had turned into a 2% annual disadvantage compared to SCV!  A massive 40%+ swing in valuations between the two asset classes in two years’ time.   Amazing…

While I have no way of knowing what will happen between asset classes over finite periods of time – I do know that SCV has a large advantage (2.5% annually) compared to the S&P 500 over the last 96 years we have good market data.  That’s an exceptionally significant advantage for an investor with a long (20+ year) time horizon.  

While I know this is too esoteric a discussion for some – hopefully the reader takes away a couple things from this newsletter:

1. The future (especially these next 4+ months) is unknown and will likely have lots of volatility given the enmity felt by the candidates and their followers.  
2. Invest in assets not based on recent trends but on underlying economics of the asset class.   That means that you will err (not completely go “all-in”) on the side of SCV with a broad mixture of asset classes.
3. You should not try to predict future unknown events – or even how markets will respond to those events if you are convinced you know them.
4. Even if we experience extreme volatility over the next four to six months – the destination for investors with longer time horizons is unchanged.  

I hope my clients have heard me beat the drum of making dispassionate decisions with data at the dinner table long enough that they can comfortably “get out their popcorn” in the midst of what I expect will be a short but tumultuous time for geopolitics and financial markets.