Trading Desk: What We Hear In This Break In The Market Noise

Turn off the market feed and take a deep breath. Clear the noise of the past year out of your head . . . because it’s been an extremely noisy year. And there’s still a lot of noise circulating around the market.

Let’s use this lull to recover a little clarity. Reset your expectations. Shake off your accumulated anxieties. Return to the essential facts that made generations of investors happy and will almost certainly do so far into the future.

Here’s one: while the worst year on Wall Street since 2008 sent the S&P 500 over a significant cliff, we’ve only erased the bulk of the progress we made in 2021. We’ve literally taken a big step back after taking a big step forward.

One step up and one step back is the Wall Street way. It’s the classic “random walk” where stocks move in circles . . . but the bias still points subtly to the upside. Even if Santa doesn’t come at all next week, the S&P 500 will probably close 2022 a little above where it did in 2020.

And 2020, I think you’ll recall, turned into a pretty good year for the market in itself. It only takes a few percentage points of Santa to shift the two-year metrics even further in the bulls’ favor.

Maybe we claw back another 3-4% next week if all goes well. In that scenario, a buy-and-hold investor has booked about 3-5% a year in tangible progress on the S&P 500 since the end of 2020 . . . not worth cheering, but a lot better than the crater a lot of noise suggests we’re facing.

The market hasn’t cratered. It’s been a frustrating year but we’re still a long way from free fall. Go back before late 2020 and the pre-pandemic peak is now 13-14% below us, receding into the past. It’s going to take a big market shock to reverse all the progress of the COVID era.

After all, stocks emerged from the trials of the last three years with leaner operations and rich margins. They’re flush with cash. And they’ve had three years to pursue their strategic plans, developing existing markets while building out new ones.

Admittedly, the Fed has turned hostile. But we’ve survived every tightening cycle to date . . . what makes this one different?

More On The Random Walk

Even counting this year’s declines, that hypothetical buy-and-hold investor has done well enough over the past decade to triple a starting stake. That’s only a little better than usual . . . and that’s another fact the market noise drowns out.

The math translates into roughly a 10% compound annualized return. It’s actually what elite investors demand from rarefied vehicles like venture capital funds: triple the starting stake across a ten-year period.

The secret for the S&P 500 is consistency. Despite three bear markets in five years, only two of them . . . 2018 and 2022 . . . have been severe enough to generate a negative full-year return.

Admittedly, 2015 came close. But who wakes up with nightmares of reliving the 2015 market? We forget the bad times because the good times are so good. And most of Wall Street’s history is spent enjoying those good times.

For that matter, even people in my office have forgotten how awful the late 2018 bear market felt. They were right here with me, every day. But they struggle to recall exactly what happened and how the bear was ultimately driven off, right around Christmas.

By the end of 2019, the damage had healed. That’s what usually happens. Even the losses of 2008 were wiped out by the end of 2010.

Only the 2000-2 bubble burst took longer to repair . . . revealing another fact in the process. Investors with the courage to buy back into stocks during the recovery period leapt back into the scoring zone extremely fast.

And there are a lot of alternatives to simply buying the vanilla S&P 500. Small stocks tend to bounce back before their larger counterparts. They’re always volatile. Even a 20% bear market is really just another step in their random walk.

I’m looking forward to seeing small stocks and growth names recover leadership. Too much of the S&P 500 is concentrated in gigantic stocks that really aren’t growing fast any more. Names like Apple (AAPL) and Microsoft (MSFT) are as mature as it gets.

I don’t mind a mature company that pays dividends but it’s time for fresh leadership. That’s how generations of investors made real money on Wall Street. And once the economic cycle turns over, that’s the story that will dominate the chatter.

Song as old as time. But you need to turn off the noise to hear it. The market is closed Monday. I’ll see you again next week with some more thoughts on the year ahead.