What is a Bear To Do?

Happy Leap Day!  As some of you may have seen on my X post today is the day all salaried employees work for free.  Or, put another, and in my opinion, a more depressing way, for the entire Leap Year we are all just making slightly less every day. 

So, with that sentiment in mind, what is a Bear to do? 

We had another phenomenal month in both the C and the S Funds.  The C Fund almost hit the average annual return investors expected from the S&P 500 15 years ago.  Read any investment newsletter from that time, and they would quote you an annual return of ~8%. 

The Bear says, the higher returns account for higher inflation, so net-net, the value returned is the same as 15 years ago.  However, inflation statistics released by the Bureau of Labor Statistics shows inflation is just about 1.2% higher than the 8% return era, so if we believe those statistics (I have a quote for you if you do) then we are still returning well above what we should be if we account for inflation.

The Bear then might say, the market is overvalued.  I think he’s right, but then again, the value of something is whatever someone is willing to pay for it, and right now, there a plenty of eager investors willing to pay for very high P/Es. 

The Bear might also say, the Federal Reserve is not going to cut rates with inflation this high.  This is where we see a convergence of the stock market as an investment vehicle versus other investments.  Right now, with interest rates so high, we are seeing debt intensive projects being put on hold and the cash placed elsewhere (ahem, stocks). When the Federal Reserve lowers interest rates, investment will start to flow to capital projects that have a higher ROI than stocks and bonds, which will have a negative effect on stock prices. Of course, this is offset by cheaper money and more investment in the market. 

So, if the Bear says fewer rate cuts in 2024 will result in a down market, he might be right, but where is all the money to go?  What I think we will see is the dip described above.  Once we hit the target inflation level, rates will be cut, and the Bears will have their moment as cash flows out of stocks and into other projects.  There will be a dip in the market when cuts are made and then a recovery will ensue.  Bears are just looking at one side of the equation (Bulls do too).

I am conflicted about this month’s investment allocation percentages.  I don’t see a very stable world right now, and as I have said in previous posts, election years tend to be very hard to analyze and predict.  The major movers of the past decade are making poor decisions, fertile ground for disruptors.  Disruption in index funds almost always has a negative effect on the index as the disrupted company falls in value while the disrupting company is likely not even in the index, and thus the offset is towards the negative.

Even with all my reservations, I am not positive on the I Fund at the moment and the F Fund, which I reserve for a safe harbor, has proved to be anything but over the last 3 years.  I’m going to remain 100% C Fund.  I think any market move to the negative will impact the S Fund first, and I think the high interest rate environment continues to be a headwind on its performance.  Keep investing!