Hi Everyone,
This month will be brief as we are moving offices (more to come on this next month).
Last week, the market extended its winning streak on the S&P 500 to five months, and looking back in history, the future looks pretty promising.
When the S&P 500 is positive for December, January, and February (the DJF Barometer), one year later the index is higher 25 out of 25 times. According to Wayne Whaley, the signal is the only 25+ case study in his domain that is perfect back to 1930. If you want to bet on something that’s never happened before, that’s fine. It’s just not something that we do around here.
While we tend to agree that stocks will be higher one year from now, for those clients who have fresh capital right now (or those clients sitting in 5% yielding T-Bills) we remain cautious in the short-term. Valuations remain elevated, speculative investments have started to come back into vogue (crypto, SPACs, etc.), the interest rate outlook remains muddled, and the first real signs of a stressed consumer have started to pop up as well. Nike, Lululemon, and Walmart have all guided for a weaker first quarter than what they were seeing just several months ago. This leads us to believe that the market is due for a traditional pullback (5-10%). At that point we would feel much more comfortable allocating additional capital, although when the times comes to buy, you probably won’t want to. Until then, sitting in a 5% money market doesn’t feel too terrible.
I’ll leave you with a passage from Berkshire Hathaway’s annual report, published early in 1987. Keeping this information in the back of our minds has proven itself quite useful over our last two decades in the business.
– Adam
“Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
– Warren Buffett