Transcription
(dramatic music) - Hello, hello everyone. Welcome back to another episode of Signal or Noise. It's Episode 64, Charlie Bilello here and with me as always, Peter Mallouk. Peter, we're approaching year end and I love to just reflect on the year lessons learned. So we're gonna do the episode we've been doing the past few years, 7 Lessons From 2025, a million lessons, but I distilled it down to just seven here. Let's start out with lesson number one. Don't fear all time highs. And you and I talked about this back in January because there were a lot of all time highs back in 2024, 57 of them to be exact. That was the fifth most of any year in history. It was a very strong year for the S&P 500, up 25%. And a lot of people were afraid of that fact saying, well, market's pretty high. It's had two really good years in a row, 57 all time highs. Can it really go even higher? And what we talked about at the time is simply just the data and what that data actually shows.
Yeah, I mean, markets climb a wall of worry and every year people are concerned that the market is overvalued. You always see a little bit of commentary around that. But when the market is steadily hitting all time highs like it did last year and this year, that drumbeat of course gets louder because everyone's always anticipating a pullback. Why are they anticipating that? Well, because they happen all the time on average every year. But markets get all time highs all the time. One in 19 days, the market's at an all time high. That's not surprising. We're not surprised when the price of a meal at McDonald's goes up. We're not surprised when housing prices go up, but somehow we're shocked when stocks go up. It's just kind of a, inflation is a very significant part of this. But so is corporate earnings and generally capitalism is very helpful to all of this too. So all time highs are very normal and even if the market is overvalued by objective measures, the market still on average hits all time highs once every 19 days. So valuation itself is not indicative of where the market is gonna go. Sometimes the market doesn't need to pull back for earnings and market prices to make sense. Sometimes they can just grow at a slower pace than earnings and get there that way as well.
Yeah, and I think what's surprising here in this chart is simply the fact that it's really no different or not very much different than the other time periods. So if we look at one year out all time highs, you tend to see a gain on average 13.5%, three years, 44%, five years, 82%. And the main lesson here is just the longer you invest, the more likely you are to have a bigger gain, the more likely you are to see those all time highs. And what we saw this year, Peter, is 36 more of 'em so far, the year's not over. So we could certainly have a few more S&P 500 total return up 17.5%. And I just wanted to point out this is this chart of the Dow 'cause this is something I've been following for a long time, waiting to see if this record would ever be broken. And really records are made to be broken because this year in the Dow, we saw that 13th consecutive year, Peter, with at least one all time high. And that broke the prior record, which a lot of people didn't think was possible. That went on from 1989 to 2000, which was prior to this really the strongest, most unrelenting long secular market. Well now we surpassed that, which is pretty remarkable.
I think we can attribute this to two things. Like just the two obvious things. There's probably many more than two things. One is the beginning part of this is about four years after the the crisis, right? And so it took a long time, you know, there's a lot of bear markets we just snap right out of like COVID for example, or the tariff bear market, just boom, it's there, you blink, it's gone. That's not how the 08-09 crisis was. It was a slog. It took years and years to get the economy going again. That's why you didn't have any all time highs from 2008 to 2012. But then you started seeing them as the market recovered in 13, 14, 15, so on. Then what happens? You have COVID, massive, massive government and federal reserve money printing, spending huge flood of money in the system. Of course that's inflationary, which ultimately helps markets too. And that combination of things helped create this. Records are made to be broken. There's always gonna be a combination of things that throws a wrench into things. This is two crises that resulted in very favorable outcomes for the market over this period of time.
Absolutely. Okay, let's go to lesson number two here. Panic is a signal. And most of the time, Peter, you and I are talking about all the different noise in markets, certainly fair share of noise this year. But there was really one period where there was a huge amount of signal. And we talked about that back in April when people were fearing a recession. The tariff situation put a lot of fear into people and it drove markets down very, very quickly. We saw actually a four day decline in the S&P 500 of 12%. It was one of the biggest declines we've seen in history over a four year period. And what we talked about back then, Peter, is during these periods it's really fear, it's panic. And that can actually be a signal because it's bringing out a lot of people into the bearish side. And we saw actually in one of these sentiment polls, the highest number of bears since March 2009. And before that you had to go back to the 1990 recession in October 1990. But if we look at this chart right here, Peter, and we've recorded an episode pretty much this day here on April 8th of this year, where this is looking at the highest VIX closes. So all of the closes, 50, the VIX goes back to 1990. And we talked about this chart and I could tell you I got a lot of responses on X from this and you did as well. When you put out this post here, every single one of the responses were saying this time is different, Peter, that yes, the VIX is above 50, but it's not going to have a recovery over the next year like it did during these previous spikes. And you back in April, really a lot of calming posts that you put out there. And you're confronting that fear, that panic that's out there. What gave you the confidence to give this message to investors back in April?
Well, I think the history, it's like you said, when you see really panic set in it, people have tended to leave the market at that point. And it tends to be an overreaction unless there's something very substantive happening in the background, which wasn't the case here. You know, for those people just listening, the message that went along with the chart is, bad investors sell when the VIX spikes above 50 as it did last week. Good investors get nervous, but hold, great investors are completely unfazed. The best investors get excited about the potential opportunities. And you're right, I mean there was a lot of vitriol underneath this post of people commenting on, you know, how stupid an idea this is and so on. I do think that, I do think that we see a lot of market sentiment permeates through the public discourse much, much quicker now because of 24 hour news, social media and everything else. So cycles that used to take a week can take just days now. Whether markets are going up or down, things could happen much, much quicker. And I think that adds to the fear and adds to the necessity to be calm in the eye of the storm.
For sure. Which brings us to number three here, which is the aftermath of that panic. Everyone loves a comeback story. And this year one of the biggest comebacks we've seen in history, Peter, if we go back to that April 8th low in the S&P 500, it was down actually 15% on the year. It seems kind of hard to believe at this point, but that was the fourth worst start to a year in history. And you only had 1932, 1939 and back in 2020. And we displayed this chart back then. It said, well if you look at those other three examples, you could see the markets actually rally here in 2020 was the extreme where it rallied so much that you actually ended the year with a pretty good return. And the year's not over yet. But so far that's exactly what we've seen, 37% advance off of the low. Are you surprised that the comeback has been this quick in terms of the markets?
I'm not surprised at all because all the things that were bullish at the beginning of the year, which is, you know, a lot of money in the system, strong corporate earnings, relatively low unemployment, technological revolution, people emerging from poverty throughout the world. All those things were still there. And what we had was a fight about tariffs. You know, that was a fight that we chose, which means it's a fight that unless it goes on too long, we can end. And so I think once it became clear and we had a lot of confidence in this, that this was gonna be a negotiation and not the, you know, something that was firm as initially indicated, it was pretty clear to me that this was gonna be pretty short lived. And I very, very rarely, very rarely do I make a prediction about market direction. And that was one of the only times in my career that I did that, you know, publicly.
Yeah. And if we look at in terms of comebacks though, Peter, this is this year, yeah, certainly it was a historic comeback, but each and every year there's gonna be a draw, like the history of markets is a history of comebacks because most of the time as an investor you're not gonna be at an all time high. You're gonna be in some type of drawdown. And the average drawdown we've seen in entry years around 14%. So yeah, it was bigger this year, but really the story of markets is one comeback after another.
That's right, average year has a 14% pullback. I mean, just to put that into perspective, you're talking about a 6000% or 6,000 point or so drop this year. I mean, just imagine when that happens and it definitely will happen and people will lose their minds, right? But it just happens every single year.
Lesson number four, the status quo is hard to break. And this is a difficult lesson to stomach because you and I, Peter have been talking about the debt and the deficit situation, hoping that it would change. We had a good amount of optimism after we saw polls like this, which suggested that most Americans were worried about this issue too. Two outta three saying that debt is unsustainable, 83% saying the government should try to move to balance the budget. So there's a lot of promise, a lot of hope. And really the status quo has continued here. If we look at the deficit, 1.8 trillion, exactly what it was a year ago, projections are that that's likely to increase going into next year because the tax revenue will likely decline under the new stuff that was passed under the Big Beautiful Bill. And if we look at the national debt, you and I talk about these milestones, not a good milestone to have here. 38 trillion now in national debt. And it's running up at a pretty good pace here. 2.2 trillion added to that debt level since we raised the debt ceiling back in early July. So a rapid increase, we're at 38.4 trillion for sure. We're gonna be talking about 39 trillion at some point probably early next year. What breaks the status quo here, Peter?
I mean, unfortunately, what's probably gonna break the status quo is an absolute crisis. Like something where the system is on the brink of breaking. So to where if the Congress and president wind up having to make very unpopular decisions, they can still be hailed as heroes for saving the system in its entirety. I've become convinced that's the case. I mean, if you're the president, if you're congress, you have no incentive to stop this. I mean, you basically have a blank check and you just do whatever you want. And then someone else comes in and then they have to go, no, everyone has to stop spending and then everyone gets mad at them 'cause there's a recession or a mild recession, they get voted out. I mean, the consequences of taking any real action to stabilize the budget, to control the deficit, there's just no positive for congress. The president, anybody that's in a position of power, it will only be a positive for them if the bus is gonna fly off the cliff otherwise. And then they have to pull on the brakes and everyone will be happy with the whiplash 'cause the alternative was going off the edge.
For sure, 100% agree. We need to see some type of crisis and that will likely present itself in the bond market. We can't sell our debt. The rate on that debt will go way up. But I think before we get to that point, Peter, there's just gonna be continued pressure on the Federal Reserve to cut interest rates to keep this game going to probably do quantitative easing at the end of November. They ended quantitative tightening, as you know. And I think that's paving the way for quantitative easing, which for the lay person out there, that simply means they're likely to print money again and start buying the US treasury debt to keep the interest rate down. So there's many ways that the government can approach this problem, but I think kicking the can down the road and trying to just keep this game going for longer is unfortunately the most likely outcome.
Yeah, unfortunately I agree.
Okay, let's go to lesson number five. Why you diversify. So entering the year, Peter, we were seeing 16 plus years of outperformance from US stocks over international stocks. By far the longest period of outperformance in history at the start of this year, the most biggest question we were getting, most frequent question we were getting from clients, from everybody was simply, why should I own anything other than the S&P 500? They were asking it for simply that chart, 16 plus years of outperformance. Why do I need that stuff? In 2024, we saw one of the biggest spreads in history with US stocks up 25%. Emerging markets, 8%, European stocks, 2.4%. And really, there's only really one reason why you need to be diversified in the face of this long-term trend, because of the chance that it might reverse course. And so far this year we've seen a little bit of a reversal, haven't we?
We have. I mean, it's only one year. It's not even one year, I definitely recognize that whenever I post this chart on X or LinkedIn, everyone loses their minds. It's only one year. But the point is, we don't know in any given year what's gonna happen. So, you know, now emerging market stocks, European stocks are up 31%. US stocks up 17.5, obviously everybody having a blockbuster year. But that's one of the biggest spreads between international stocks and US stocks in history. I mean, 13%, very significant difference. Is it sustainable? Will it continue? Who knows? 2000, 2010 European and emerging market stocks had an amazing run. US stocks earned 0%. To your point, the last 16 years, US stocks had the longest outperformance over international stocks in history. Is this the reversal at like we had at the end of the lost decade? Nobody knows. And that's why you diversify.
Yeah, 100%. I would just add to this, this chart right here, which suggests to me, Peter, that it's really more important than ever to keep that diversification in place. Because if you're just holding the S&P 500 today, 40% is in the top 10 holdings, which means that you have less diversification in that index. Now that's been a good thing, right? Over the past few years because those top stocks have outperformed. But I think in the next decade, at some point we've seen it this year already, you're gonna be benefited from holding other stuff in your portfolio in case this trend were to reverse. Are you thinking similar here in terms of this concentration risk isn't so much, well, these leading companies have to fall. It's just that if these leading companies start to underperform, well then there's a chance we could see something similar to what we saw after 2000 where you have different leadership going forward.
Yeah, I mean, we are going to have a pullback at some point there. There has to be no stock goes on or a double digit run forever. And having 40% of the weightings of the S&P 500 in just 10 stocks, you know the other, the other 59.5% is 490 stocks is incredible. Now should we be overweighted tech? Should we overrated the AI revolution? I think we should. I mean that's very clearly the future, but we don't know who the winners and losers are yet. But everyone talks about these seven to 10 stocks, whether it's the mag seven or the great eight or the top 10 or whatever, as if like when they crash, everything falls apart, other things tend to rise up, right? There are other stocks in the S&P 500. There are other stocks that aren't public yet that may become these next companies. Is it OpenAI? Is it Anthropic? I don't know which ones they are. But there was a period where Monster Energy led the S&P 500. There was a period where Southwest Airlines led the S&P 500. So there's a rotation here that happens. Everything doesn't live or die by these top stocks. There are future top stocks in here. Nvidia was not one of the top stocks a few years ago. Now it's the biggest stock. It's carrying a lot of the performance of the S&P 500. And so what's the next Nvidia? We don't know what it is, but it's probably in the S&P 500 or going to be in it soon.
Yeah, I think it that's lost on a lot of people that 10 years ago Nvidia was $10 billion market cap and this year it hit five trillion at one point. And had you said 10 years ago, I'm just gonna stick with the biggest stocks you would've missed out. Obviously on Nvidia, we don't know what the next Nvidia is gonna be. So that's yet another reason why you should be diversified. 'Cause you're gonna then own everything, which by extension means you're gonna have all of the next big winners. Let's go to lesson number six here. Every bear market is different. And this is an important point for a lot of reasons for investors to understand. But just looking at this chart here, Peter, you can see the red bars, all different types of magnitude, all different types of durations this year. Very mild of course. It was very quick in terms of top to bottom, you're talking about two months and then we know the recovery coming out of it. But just looking at historical bear markets, we really haven't seen one of these bigger, longer bear markets since the financial crisis.
Right. I mean we all bear markets are not created equally. I was at a conference in New York on Monday, we were talking about all the bear markets we've been through and I said, look, you cannot count these last couple bear markets. I mean you were on a vacation and tuned out for 10 days, you missed most of the last couple bear markets. I mean there are a lot of Americans that they were busy seeing patients as doctors or practicing law and didn't even know what happened. So yeah, the bear market's technically a drop of 20% or more. We've had a couple of those, but they've been so fast. It doesn't matter. COVID was probably the last one you could call a bear market, 34% drop. Everyone watched every minute of it 'cause they were trapped in their homes. But if you blinked, you missed it. COVID went on a long time, but the market being down did not at all. I think the last real bear market where you had time to make serious mistakes was the 08-09 crisis. And to me that's a real bear market is it's going on a long time and you have time to make investing mistakes. So to me that would be 08-09, 9/11, the tech bubble, those last three I would I ignore, those are the three, the last three I consider real bear markets. Technically the last three bear markets we've had count, but just not the same. It's not a real test of investor fortitude.
Yeah, and I think what you're getting at here is basically, well how long does it take to recover? Because the last few have recovered so quickly that you really didn't need much safety in your portfolio. But if we go back to the 2000 to 2002 bear market, it took 75 months from the prior high to get back to a new high, 2007 to 2009 financial crisis, 55 months, here you're talking about years, Peter, which is kind of a thing investors have to think about, have to prepare for if you have a liquidity need in three, four, five years. That's why you would suggest to have that portion of your portfolio in something that isn't subject to this type of volatility. Is that right?
That's right. That's exactly the point.
And if we look at in terms of every bear markets, I think this is extremely important for people to understand 'cause we often equate the stock market with the economy. You don't need a recession to cause the stock market to have an official bear market. We saw that again this year. We saw it back in 2022. That doesn't mean people aren't gonna be talking about recession while the stock market is going down. But these are not one in the same. The stock market is not the economy. And when you're talking about, well, we really haven't had a real bear market. I think part of that too, Peter, is simply we haven't had like COVID, you have to kind of throw that out because of the type of recession it was and the stimulus that was going on at the time. You have to go back to the financial crisis to have a big stock market decline accompanied with a rise in unemployment. And that's something we really haven't seen in some time.
That's right. That's a real bear market. Real fear. People are feeling it at home, they're feeling it in their portfolios and it's going on for a very long time. That's where investors really get tested. We just have not seen that in a long, long, long time.
For sure. And last point on bear markets, and this is something that's hard to appreciate while you're in the midst of it, but in terms of trying to time it, and we get this question all the time. Well, bear market has started, shouldn't I get out now at 20% and then if it goes down 40, 50%, I could buy it back in. And what we often say, Peter, is that's extremely difficult because obviously no one knows where the bottom is going to be. And the other point is though, when that bottom is hit, it doesn't move up in a steady line. So we're up already 38% off of those April lows on a closing basis, intraday basis over 40%. It's not even a full year from the lows.
That's right. I mean like, it does not take a long time for some bear markets to recover and a lot of times when you see the market down at the beginning of the year, you know, clients said to me, well it's gonna take me at 7%. It's gonna take me three, four years to break even. Of course it's like a rubber band. You pull it back once, once whatever the clouds are that are holding down the market dissipate tends to spring forward very, very quickly.
All right, let's go to lesson number seven here. Most important lesson. And that's time is way more valuable than money, Peter. And people just judging from household debt worth, we see a saw a 6X increase over the last 30 years. We hit a record coming into the year. We don't know the number yet for this year. The year's not over, but likely to see this go up as well in some high percentage I would guess just based on the stock market performance. But that's your net worth. That doesn't mean necessarily then you're gonna translate that into how you manage your time. And you and I often talk about this, there's asset allocation, there's time allocation, and every day you should really be thinking about one thing and one thing only. How do you wanna spend your time?
Yeah, I've been ending a lot of my presentations and our presentations together with this lately. Time is the only currency you spend without knowing your balance. Use it wisely. I think it's interesting as advisors, we can sit with a client, go, this is what's in your 401k, this is what's in your IRA, this is what your house is worth. Your stocks are worth, your bonds are worth. But no one knows the most important balance, which is time. You know, how much time do you have left to enjoy all this? I mean, every day is a blessing. You have to have this framework in your mind too. We don't control this part of the equation, unfortunately.
No, for sure. And we lost our dear friend and colleague this year, Jonathan Clemens. Just a reminder, right, that you don't, you really don't know. And think about that time allocation before it's too late. Think about it in advance. And Peter. this the time of year people start thinking about vacations for the next year. And I know this is often something you think about is the number of summers that you're going to have in a lifetime.
Yeah, I find myself always doing math. I'm at Disney World with kids. How many more times am I gonna do this? I'm on the beach and that spring break. How many more times am I gonna do this? I wish I could get my brain not to do that, but this is one of my favorite things I've posted ever 'cause I think it really gets to the bottom of it. The problem is you think you have time. On average, we get 80 summers if we're lucky. Don't put off the trips. Stop waiting for life to begin. Stay up late with friends. Get up early to watch the sunrise. Catch every sunset. Book the trip. Go on that hike, go to the beach. Spend time with those you love. Tell them how you feel.
Can't think of a better way to end than that. Thanks everyone for joining us on Signal or Noise. If you're watching this on YouTube, hit that subscribe button. We're also available on Apple and Spotify. And Peter and I will see you on the next episode, the last episode of the year for Signal or Noise. (dramatic music)