February 9, 2024
By Steve Blumenthal
“Based on dozens of measures that include valuations, internals, overextension syndromes, and numerous technical, fundamental, and cyclical gauges we’ve developed over time, we estimate that current market conditions now ‘cluster’ among the worst 0.1% instances in history—more similar to major market peaks and dissimilar to major market lows than 99.9% of all post-war periods.”
– John Hussman, Hussman Funds
I’m racing to catch one more day of powder snow at Snowbird today, so I’ve got just a short intro for you this week. In today’s On My Radar, you’ll find an excellent interview with one of the greatest economists of our time, Dr. Lacy Hunt. While market participants are positioned for a soft landing, Lacy believes we should prepare for a recession. It’s hard to bet against him.
Economist and fund manager John Hussman sees a small handful of extreme instances similar to what we’re witnessing today that were typically followed by abrupt market losses of 10%-30%, with smaller losses often seeing deeper follow-through later on. Details below. Felix Zulauf shares his own thoughts on this in his recent newsletter titled “Approaching a Top.” Lights on.
We’ll also look at recent valuations and set some targets for the S&P 500 Index through the lens of Median PE (price to earnings). But first, let’s begin with Blue Fox’s tribute to the late, great Byron Wien: the 10 Surprises of 2024.
On My Radar:
- The Ten Surprises of 2024
- Dr. Lacy Hunt Interview with Adam Taggart
- Clusters of Wow, John Hussman
- Median PE
- Random Tweet’s
- Personal Note: It Is!
- Trade Signals: Weekly Update, February 7, 2024
The Ten Surprises of 2024
Blue Fox Advisors recently published a 10 Surprises Tribute to Byron Wien, the beloved investor and former chairman of Blackstone Advisory Partners who published his own 10 Surprises lists regularly. Blue Fox’s Jennifer Mendel sent the link to me, and I owe her a big thank you. From Blue Fox:
“In memory of the legendary Byron Wien, we have assembled an all-star cast of Byron’s colleagues and friends to create a tribute to honor his legacy. This video includes a history of the Ten Surprises, a forecast featuring a new 2024 Ten Surprises list, stories about how these titans of the investment community first met Byron along with unique memories from their time together over the past five decades. To download the Surprise Slide Deck and for additional information, please visit https://bluefoxadvisors.com/tensurpri…
Dr. Lacy Hunt Interview with Adam Taggart
Adam Taggart interviewed the great Dr. Lacy Hunt on Thoughtful Money last week. Lacy is Executive Vice President and Chief Economist of Hoisington Investment Management Company and a former Senior Economist to the Federal Reserve Bank of Dallas, as well as several other large banks. So, what did Lacy say? “Prepare for a recession; the Fed’s optimism is wrong.”
Their conversation covers many burning questions on our minds, considering the all-time highs we’re seeing in the S&P and Nasdaq and the shockingly positive Q4 GDP data:
Are we in the clear? Will we actually see a soft landing and side–step the lag effects everyone expected to see after the Fed’s aggressive rate hikes and Quantitative Tightening? Is inflation on its way out?
Put your earbuds in and head out for a nice walk. This interview is Lacy at his best!
Click on the image to watch/listen to the interview
(Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.)
If you are not signed up to receive the free weekly On My Radar letter, subscribe here.
Cluster of Woe
To me, investing is a probability game, and my forecast hasn’t changed: I expect to see a wild, roller coaster–like ride, with big ups and big downs, over the balance of the decade. Back to a “buy low, sell high” trading environment. A period that favors active management over buy-and-hold, cap-weighted index funds. In his latest market commentary, John Hussman agrees:
“Based on dozens of measures that include valuations, internals, overextension syndromes, and numerous technical, fundamental, and cyclical gauges we’ve developed over time, we estimate that current market conditions now ‘cluster’ among the worst 0.1% instances in history—more similar to major market peaks and dissimilar to major market lows than 99.9% of all post-war periods.
“I call this the ‘Cluster of Woe’ because the handful of similarly extreme instances (most notably in 1972, 1987, 1998, 2000, 2018, 2020, and 2022) were typically followed by abrupt market losses of 10%-30% over the next 6-10 weeks (average -12.5%), with losses at the smaller end of that range often seeing deeper follow-through later. Still, I treat these outcomes as ‘regularities’ rather than ‘forecasts,’ and my impression is that investors don’t accept those regularities anyway.
“You may recall that the most recent instance prior to this one was in July 2023 (see Air Pockets, Free-Falls, and More Cowbell). It was followed by a quick 10% air pocket into late-October, but with no deeper follow-through as yet.
“A somewhat less pointed way to think about current conditions is to identify instances in history that were ‘closest’ based on a broad set of key cyclical market indicators (valuations, market internals, overextended syndromes, and various proprietary gauges). The chart below shows these ‘nearest neighbors’ since 1998 as red bars.
“These neighbors include a number of less extreme instances than those noted above, and not all of them were followed by steep declines. For example, the 2014 similarity was simply resolved by the S&P 500 going nowhere over the next two years. Without making near-term forecasts, suffice it to say that current conditions are the sort of rare market extremes that tend to resolve badly.”
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
If you are not signed up to receive the free weekly On My Radar letter, subscribe here.
Median PE
At the beginning of every month, I look at NDR’s Median PE chart. It has a 59.9-year history of plotting the S&P 500’s Median PE month by month. To get the median, plot all 500 stocks’ PEs and take the one in the middle (PE on stock #250). I like this measure because it looks at the actual PE and not some Wall Street–forward earnings estimate (which are often overstated). I also like it because it helps to better visualize potential in trading targets.
The most recent Median PE reading is 25.7. You’ll note that that’s down from its high point in late 2021, but it’s still in the “overvalued” zone (the orange line in the graph is the level of each month-end PE since 1964). The 59.9-year Median is 17.6.
NDR calls 17.6 the “Median Fair Value.” Then they apply a standard deviation (SD) measurement above and below the 17.6 Median PE. Since the late 1990s, a 1SD move has occurred approximately seven times, but a 2SD occurred just twice. We sit back above 1SD today. See these in the graph by looking at the orange line followed by the dotted 1SD and 2SD lines (both above and below the blue dotted 59.9-Year Median 17.6 PE line).
What’s cool to me is how they use math to set index-level targets (lower section). For example, “overvalued” (a 1SD move above the 59.9-year Median PE) is 4395.00. To get back to “Median Fair Value,” the S&P 500 needs to decline to 3319.27. That requires a decline of 31.5% and should not be ruled out. Plus, it would be an excellent place to enter the stock market in terms of earning higher returns.
A move to the -1SD “undervalued” target, or 2248.38, has a low probability. I personally think policymakers and the Fed will turn the money machine on high, preventing such a move—but I could be proven wrong.
Bottom line: A move to somewhere between 3300 and 4400 is probable.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
Random Tweet’s
Peter Boockvar
Billionaire Barry Sternlicht says remote work will lead to $1 trillion in real estate losses: “The office market has an existential crisis.” (Click on the photo to watch the interview.)
From @jessefelder linking to CNBC interview:
You can follow me on X (formerly Twitter) @SBlumenthalCMG.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
If you are not signed up to receive the free weekly On My Radar letter, subscribe here.
Personal Note: It Is!
I am writing to you from Snowbird, Utah. Last week, I wrote about the feeling of skiing in deep powder snow. It’s hard to describe, but think of it like floating on a cloud down the mountain. Or, as I titled last week’s section, “It must be heaven.”
As luck would have it, it is heaven! Nearly three feet of snow has fallen since we arrived last Saturday, and it’s snowing again this morning, with another 4” expected. Lucky indeed. In snowstorms like this, the wind blows, filling in the tracks made by other skiers with fresh wind blown snow. Skiers call it “free refills.” Certain areas on the mountain collect more snow than other areas. These are called “bowls,” where the snow is much deeper.
Today is my oldest daughter’s birthday. I remember putting her in a backpack and skiing down a bunny slope called Chickadee when she was just three months old. Her mom was scared (she was probably right to be), but my tiny daughter didn’t seem scared at all. We’ve had a wonderful 31 years since. Work will have her glued to the computer and calls today, but hopefully, she’ll be able to sneak in a lunchtime run. If we’re really lucky, Snowbird Ski Patrol will open up our favorite section of the mountain. It’s been closed all week, and avalanche risk will be high until they blast the cannons to make it safe for skiers. The bowl area here has a long and fairly steep pitch—simply perfect!
I’m home to Phila tomorrow, but in the meantime, I’m checking in happy and high on the mountain.
Best wishes from my family to yours.
Have a wonderful week,
Steve
Trade Signals: Weekly Update – February 7, 2024
“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
– Charlie Munger
Each week, we update our dashboard of indicators covering stock, bond, developed, and emerging markets, along with the dollar and gold charts. We monitor inflation and recession as well.
If you are not a subscriber and would like a sample, reply to this email, and we’ll send you a sample.
The letter is free for CMG clients. It is designed for traders and investors seeking a better understanding of the current macro trends. You can SUBSCRIBE or LOGIN by clicking on the link below.
TRADE SIGNALS SUBSCRIPTION ACKNOWLEDGEMENT / IMPORTANT DISCLOSURES
The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice. Not a recommendation to buy or sell any security.
With kind regards,
Steve
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Private Wealth Client Website – www.cmgprivatewealth.com
TAMP Advisor Client Webiste – www.cmgwealth.com
If you are not signed up to receive the free weekly On My Radar letter, you can sign up here. Follow me on Spotify, Twitter @SBlumenthalCMG, and LinkedIn.
Forbes Book – On My Radar, Navigating Stock Market Cycles. Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.
IMPORTANT DISCLOSURE INFORMATION
This document is prepared by CMG Capital Management Group, Inc. (“CMG”) and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, CMG’s actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing, and transaction costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice. The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice.
Investing involves risk.
This letter may contain forward-looking statements relating to the objectives, opportunities, and future performance of the various investment markets, indices, and investments. Forward-looking statements may be identified by the use of such words as; “believe,” anticipate,” “planned,” “potential,” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular market, index, investment, or investment strategy. All are subject to various factors, including, but not limited to, general and local economic conditions, changing levels of competition within certain industries and markets, changes in legislation or regulation, Federal Reserve policy, and other economic, competitive, governmental, regulatory, and technological factors affecting markets, indices, investments, investment strategy and portfolio positioning that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties, and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Investors are cautioned not to place undue reliance on any forward-looking statements or examples. All statements made herein speak only as of the date that they were made. Investing is inherently risky and all investing involves the potential risk of loss.
Past performance does not guarantee or indicate future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by CMG), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CMG. Please remember to contact CMG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. CMG is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice.
No portion of the content should be construed as an offer or solicitation for the purchase or sale of any security. References to specific securities, investment programs or funds are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities.
This presentation does not discuss, directly or indirectly, the amount of the profits or losses realized or unrealized, by any CMG client from any specific funds or securities. Please note: In the event that CMG references performance results for an actual CMG portfolio, the results are reported net of advisory fees and inclusive of dividends. The performance referenced is that as determined and/or provided directly by the referenced funds and/or publishers, has not been independently verified, and does not reflect the performance of any specific CMG client. CMG clients may have experienced materially different performance based upon various factors during the corresponding time periods. See in links provided citing limitations of hypothetical back-tested information. Past performance cannot predict or guarantee future performance. Not a recommendation to buy or sell. Please talk to your advisor.
Information herein has been obtained from sources believed to be reliable, but we do not warrant its accuracy. This document is general communication and is provided for informational and/or educational purposes only. None of the content should be viewed as a suggestion that you take or refrain from taking any action nor as a recommendation for any specific investment product, strategy, or other such purposes.
In a rising interest rate environment, the value of fixed-income securities generally declines, and conversely, in a falling interest rate environment, the value of fixed-income securities generally increases. High-yield securities may be subject to heightened market, interest rate, or credit risk and should not be purchased solely because of the stated yield. Ratings are measured on a scale that ranges from AAA or Aaa (highest) to D or C (lowest). Investment-grade investments are those rated from highest down to BBB- or Baa3.
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
Certain information contained herein has been obtained from third-party sources believed to be reliable, but we cannot guarantee its accuracy or completeness.
In the event that there has been a change in an individual’s investment objective or financial situation, he/she is encouraged to consult with his/her investment professional.
Written Disclosure Statement. CMG is an SEC-registered investment adviser located in Malvern, Pennsylvania. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy, or exclusively determines any internal strategy employed by CMG. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at www.cmgwealth.com/disclosures. CMG is committed to protecting your personal information. Click here to review CMG’s privacy policies.