Wednesday's Market Minute: Taking the Stairs Down

There’s a popular phrase in investing that stocks take the stairs up and the elevator down. It’s been true throughout history: stocks spend most of their time – like 75% of it – climbing step by step higher, until, usually due to recession, they give a big chunk back real fast. A darker illustration I’ve heard people use is that in some instances, stocks jump out the window. 

“Stocks take the stairs up” is a close cousin to the more recent, aggressive trading adage among COVID-era gamblers that “stonks only go up.” As goofy as it may sound, that one’s rooted in the same core truth of the U.S. stock market’s reliable 7% annualized return since inception. That number is the simple, all-powerful selling point behind the passive investing boom, the key piece of data that’s constantly repackaged by investment advisors who want to charge you to park your money and do nothing, the new, bizarre industry of buy-only newsletter writers, and, of course, the old-school permabulls on TV who make a living selling ads.

I’m worried that like every profitable investing strategy, the truth that stocks only go up can be arbed away. Exceptions to market rules have a way of coming into existence precisely when masses of investors begin to bet on them. (Ahem, speaking of which, anybody checked in on the status of the breadth thrust from last month that’s supposedly a sure-fire indicator of an incoming rally?). It stands to reason to me that in the biggest stock market bubble in history during COVID, we may have overgrazed the field to the point of no return. That means the herd is no longer self-sustaining.

COVID valuations indicate an incoming era of sub-optimal returns. Price-to-earnings of U.S. stocks versus international clearly favor international in a way that could shift that long-held assumption of S&P 500 dominance in a way nobody really has in their framework. The Treasury yield curve continues to plunge into the abyss – we know it’s been foolproof as a recessionary indicator when it goes below zero, but has anyone considered what the magnitude and duration of such an inversion might imply? What if the depth of curve inversion is correlated to duration of the corresponding slowdown? Because it's inverted more than anything in recent history.

An elevator-style drop in stocks has never resonated with me as the likely post-COVID trajectory. Just look at the last six months: inflation cools, prices of houses and cars drop, people pounce on it and spend what they have, inflation comes back, stocks go back down. What makes sense to me in the good-data-is-bad world of today is a slow, arduous decline in which surprising strength in the labor market keeps a floor under inflation that erodes away the stock market step by step.

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