- Over the years I've developed a set of 7 market rules, ranging from controversial to benign. Or so I thought.
- This past week, I sparked a debate by citing Rule #7: Stock markets go up over time.
- The theory behind this rule is that over time, investment money continues to flow into global equities. It isn't that complicated.
Given how divided the general populace is these days, it wasn’t overly surprising that the one of the simplest and least controversial of my market rules sparked a good deal of debate this past week. Here is a quick recap of my list and some of the arguments they’ve sparked over the years:
- Rule #1: Don’t get crossways with the trend. I based this on Newton’s First Law of Motion applied to markets, “A trending market will stay in that trend until acted upon by an outside force, with that outside force usually noncommercial (fund, investment, etc.) activity.” I highlighted that last part because it is there the hullabaloo breaks out. Those arguing against this rule fall in two camps: The “Fundamentals drive markets” and “Funds are trend followers, not trend setters”. I’ve largely learned to ignore both groups over the years.
- Rule #2: Let the market dictate your actions. Here’s where fundamentals start to come into play. In futures, we can read a market’s real fundamentals by looking at basis and futures spreads. Of course, the USDA addicts quickly scream supply and demand only comes from the grace of government. This group is harder to ignore, but well worth the effort.
- Rule #3: Use filters to manage risk. What I mean by filters is things like seasonality, price distribution, and market volatility. Still, some use seasonality as a hard and fast rule rather than a guide, point out price distribution is made obsolete by long-term demand markets (an argument with some value), and a general lack of understanding about market volatility (see my recent piece on feeder cattle).
- Rule #4A: A market that can’t go down won’t go down, and 4B: A market that can’t go up won’t go up. It has been pointed out to me these are nothing more than hedges against markets not doing what was expected. That’s exactly what they are, and that was my point when I put it together.
- Rule #5: It’s the what, not the why. Market “reporters/analysts/commentators” hate this one because the bulk of their day is made up making up reasons why markets move. The reality is we don’t know the why, but we can see the what, and that’s all that matters.
- Rule #6: Fundamentals win in the end. Next to #7, I’ve long considered this one of the least controversial of my rules. Yet there is always the group who get all foamy when markets don’t follow the fundamental situation they see out their window. It’s a big world out there folks.
Which brings us to Rule #7, “Stock markets go up over time”, the one that sparked all the debate this week. So far I’ve heard something old, “What does an inflation adjusted S&P chart look like?”; something new, “1929 called. Took a while to knock out those highs…”; something borrowed, “Stock markets do not equal the economy!”; and something blue, “Until they don’t.”. There isn’t enough time to debate with everyone who wants to believe everything is terrible these days, so I won’t. Instead, let me explain again what I mean with Rule #7.
When I first started dabbling with trade in the S&P 500 ($INX) back in October 1987, the index was priced near $220. In January 2022 the same index hit a high near $4,820, roughly 22 times the value. Have there been selloffs? Of course, I never said stock markets go straight up, just up over time. Has the S&P lost value to money over the past 40 years? This depends on who you ask, with the studies I found also seeming to fall along political party lines. That being said, there seems to be an agreement of a real-value high occurring in 2007, though as soon as I say that I know there will be further disagreement.
The point behind Rule #7 is to show there is a constant: Investment money tends to flow into stock markets over time. Yes, that money has different values over the years, but it doesn’t stop the trend. As I was putting electronic pen to paper a MarketWatch piece came out with the teaser, “American households are invested in the stock market like never before.” Of course this was followed with a biblical proclamation, “That could mean seven lean years,” according to a Wall Street veteran.
Is it too early to hit the Wassail?
As I talked about in this space last time, increased investment money in stocks could pull money away from commodities, particularly with fewer markets in the latter sector showing bullish fundamentals (Rules #2 and #6) than heading into years past. Meanwhile, the three major US stock indexes have been in long-term uptrends since the end of October 2022 with US Treasury futures establishing long-term uptrends at the end of November 2023. This tells us investment money could, possibly should, continue to move into the other two sectors this coming year and out of commodities. Unless fundamentals change. Or long-term trends reverse course. But we won’t know that until they start to happen.
Until then, stock markets go up over time.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
