What We're Thinking: Silver Linings

 

The news, opinions, chaos, and sentiment for a large part of the population is deeply negative. We get it. But this has happened before. Hear us out. 

The University of Michigan Consumer Sentiment Index has been published monthly for over 50 years. It's proven to be a reliable send-ahead on whether to lean into or lean away from investing.

 

Since 1974, the Index has fallen below 60 in only 4% of all the months, including the most recent reading. That makes this situation quite rare.

In those few extremely negative cases, the stock market- measured by the S&P 500- was higher five and ten years later. Every time. Not only was it higher, but in 71% of the cases, it was higher by more than the well-known 10% average per year. Leaning in paid off. Silver lining.

Next chart. The CNN Fear & Greed Index. 

This Index is a composite of seven stock market indicators. The plots here are monthly through 2024. Since then it has slipped to under 25. Extreme Fear. That's only happened four other times in its history. Each time was an opportunity to lean in. Silver lining.

Next topic. Some factoids about recent markets.

Earlier this month, the S&P 500 was down 12% in four days, one of the largest 4-day declines since 1950. What happened in prior similar cases? Stocks moved substantially higher over the next 1, 3, and 5 years. Every time. Silver lining.

While the S&P 500 was sinking, the Volatility Index (VIX) had its 3rd largest 4-day spike. That put it in the top 1% of its historical readings. Stocks bounced back every time. High volatility = fear = opportunity for long-term investors. Silver lining.

Those were about the downside. What happens when things go up?

Well, on April 9th, the S&P 500 had its largest one-day gain since 1950. What happened in the past following big 1-day gains? Stocks moved substantially higher over the next 1, 3, 5 years. Every time. Silver lining. 

The Dollar

Lots of noise here, too. But when we look at this 40-year record, we're like, meh. Not the end of the world. Not even close. We're about in the middle of the historic range. Lets talk about something else.

The Bond Market

Like the dollar, lots of noise. We use the 10-year Treasury as a basic reference. The rise from near zero rates in 2020 to 5% happened by October, 2023, where this chart begins. Since then, rates have fluctuated between 5% and down to 3.6%. Right now, we're at 4.3%, about right in the middle of the range.

One of three things are most likely from here. Inflation could heat up. Recession could set in. Or there's a combination of the two- stagflation. In the inflation scenario, maybe this goes north of 5. If its recession, we'll be seeing something under 4. Stagflation? Things stay about the same. Stay tuned.

 

Conclusions
So, what do we do? Historically deep funks like this have happened before. And each time, they've been the nurseries of astonishing rebounds. Every time. We're leaning in. Let's not let a good crisis go to waste.

That said, the short term is typically volatile, messy, not profitable, and stomach-churning, Having sufficient assets outside of the stock market to draw upon as needed is essential. We're also comforted by knowing that anyone reading this already has a globally diversified portfolio with an asset allocation appropriate to their situation and temperament. But maybe you'd still like to talk it over. That's what we're here for. We love those conversations.

James Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315

Evidence-based. Rules-driven. Policy-focused.