- Martin Sosnoff
I Spell Recession With A Capital “R”
Nowadays, when blindsided by a big earnings shortfall, the write-down overnight ranges anywhere from 15% to over 25%, as in Netflix. Staid operators like Walmart, Costco, Deere and Home Depot can shed mucho dollars, too. I remember, decades ago, they took IBM out to be shot. Polaroid ran out of new toys to sell and Xerox fell off my charts. Japanese 8mm film and cameras took market share.
How many old grizzlies still managing money lived through the deep recession of 1973 – ‘74, the Cuban missile crisis and later Paul Volcker’s early eighties jab in the kishkas? Paul put up money market rates to 15% which collapsed the stock market down to book value from 2 times book. Nobody today calls attention to our market still ticking at 2 times book and 20 times optimistic earnings projections.
During the deep real estate recession in 1973 – ‘74, particularly in the Big Apple, owners of co-ops walked away from their apartments because of their high maintenance charges. Then, I bought a place in the Dakota for $87,500, while everyone lectured me I was out of my skull.
Each generation of money managers and investors sooner or later experiences the bite of a bear market, how it crushes stocks that take forever before their comeback. What I find so eerie is that the unfolding pattern of asset destruction gets repeated, decade to decade.
Lemme take you back some decades. Everyone needs to appreciate that negative returns for the market do last for at least a decade. Real returns for stocks ranged lower than earnings yields throughout our financial history. Even the Greenspan model was deeply flawed. In the absence of rising levels of valuation, real returns are systemically lower than earnings yields throughout our financial history.
Sombrero time? Normally a fully invested skeptic, I hope some sense of valuation bails me out early on. (A sombrero chart pictures a moribund property.) Chartists chant Kaddish over sombreros, but after the rollercoaster ride of 2008 – ‘09 when banks wrote mortgages with flimsy asset coverage, you coulda bought Citigroup and Bank of America for a song. Time of entry is forever the critical factor.
Consider the penalty for a bad entry point back into the market or a stock can be enormous. If you bought the NASDAQ Composite at its top in 2000, it woulda taken you 15 years to recover to its 2000 peak.
I deal with 5-year intervals, the average life of a growth stock’s primacy. I don’t retain Buffett’s patience for holding American Express over 50 years. Averaging down on a stock makes no sense to me.
Reckoning from history in market cycles is critical to understanding where you stand in an unfolding setting. The Street never deals with how much markets can fall. Not good for their business to do so. After all, our major banks carry trillions in invested assets for their clients.
The 60/40 ratio of stocks to bonds prevails, but doesn’t protect you when both stocks and bonds are in retreat. Running your finger over the chart of the S&P 500 from 2000 to 2015 is instructive because it encompasses the internet bubble of 2000 and the financial meltdown of 2008 – ‘09 when banks self-destructed with their mortgage writing excesses.
In both cycles, the S&P 500 crated below 1,000, near book value for stocks. Yields then exceeded 5% and the market sold at 10 times perceived earnings. All this suggests sizable downside room today. Our market yields maybe 2% and sells near 2 times book value.
I delved back further; during the Cuban missile crisis quotes for even big capitalization stocks evaporated. Then, in 1974, on a soft summer’s night President Nixon devalued the dollar and the S&P 500 Index touched down at 100, yes par. Years later, Paul Volcker plunged the country into deep recession, the market again sold down to 100 in 1982, yielding 5.6%. In 2002 the market again bottomed out below 1,000, actually at 800. In summary, bear market bottoms range below 1,000, yield over 5% and sell at 10 times depressed earnings. Today, the S&P 500 flirts with a 4,000 number.
NASDAQ, nearing 12,000, sold around 4,000 less than 10 years ago. There is only 1 conclusion to draw from such numbers. Given a bear market, it’s a long way down from here and now.