TSP Smart: Charles Schwab on the Correction

Oh boy. One of the things I harp on is that while the market spends 80% of the time in a bull market, it often gives back all of the bull market gains during the other 20%. The “often” occurs during secular bear markets which are a series of cyclical bull and bear markets that go no where for a long time. I consider us to be in a secular bear market now with a lot of interference from extreme monetary policy.

In a recent Charles Schwab market commentary titled Market Correction: What Does It Mean they show the most unhelpful distorted chart I have seen on market cycles.

The bear markets look like nothing and there is a reason – a bad chart. Bear markets can not lose over 100%. The deepest bear market lost 57% which requires a 132% gain to breakeven. That small tiny bear market in 2008 wiped out OVER 100% of the bull market prior to it. The chart distorts reality.

Let’s impose the secular cycle on this chart and make some sense of history.

Now we can see what those series of bull/bear markets did nothing from 1968 to 1982 and also from 2000 to 2013. The indexes traded sideways… but profits did grow which allowed their valuation levels to reset. In 1982 the market began a new secular bull market which gained 1200% in 18 years – wow.

So are we in the early stages of a new secular bull market? Hell no.

In 1982 interest rates were sky high and the market valuations were in the basement. Today, real interest rates are negative and market valuations are at historical bubble highs based on reliable valuation models. The exact opposite.

The only reason the secular bull market was extended was due to extreme monetary polices that have become more extreme in 2020 along with the tax cuts for the top 1% investor class.

The issues at hand today are:

  1. Interest rates can not go lower and repeat the 1982 to 2020 drop from 18% to near zero.
  2. The top 1% investor class are paying less in taxes than all of the other 99% for the first time in history and this will may be reversed soon.
  3. The amount of money creation out of thin air is reaching limits that will break something.
  4. We are in an economic depression, period. How deep and how long depends on where fiscal policy is directed. So far, it is pointing to deep and long.

Most financial planners and the TSP Lifecycle funds do NOT adjust market exposure based on anything but how close you are to retirement. During secular bull markets this typically works fine. But in a secular bear market it is not only dangerous, but does not lead to positive outcomes unless you are lucky and hit retirement near a cyclical bull market top and actually de-risk.

We are at the top of an extension to a secular bull market of historical proportions.

The volatility in the market the last few years is due to a tug-o-war between the free market trying to reset and policy maker massive interventions. While they can push financial asset prices around, they can not fix the economy or repair corporate balance sheets. Valuations are extreme. Which equals very low future returns until the reset.

If you are young or middle career you may get another secular bull market, but if you are over 50, I’m sorry your returns will be low but you might be able to catch one of those cyclical bull markets before your retire… after a major reset provides a cushion from risk. Everything else is speculation in a high risk market.

Invest safe, invest smart

Michael Bond

TSP Smart & Vanguard Smart Investor serves serious and reluctant investors

Categories: Perspectives