The Cycles Are Now Turning

A major inflection point is here... Charts tell the story... The Great Bull Market is running out of steam... The cycles are now turning... The Fed has jawboned stocks lower... Get ready for next week...

Five long-term cycles are at or near major inflection points...

I've mentioned four of them before, but never all in one place. I (Dan Ferris) will do that in today's Digest...

Overall, the cycles suggest that we humans tend to go through periods in which we get very excited about the future, investing in and speculating on new technologies...

Then reality hits, and many of those investments fail... Pessimism sets in, and we realize we've been neglecting investment into existing businesses that we take for granted.

Then eventually, the cycle turns, and we get optimistic about a bunch of new, new things again...

It's a highly simplified narrative, but I promise you'll see this tick-tock historical rhythm on the charts I'll show you today...

Once I realized that all these cycles look like they're turning or about to turn... and that each one implies a new investment opportunity that I haven't considered in many years... I started getting really excited about the possibilities... And you should too.

It's no exaggeration to call this the most exciting financial-markets moment of my lifetime...

I am eager to see what the next 10 years will be like... except that I'm 60 now, and I welcome time to move as slowly as it wants!

In today's Digest, I'll show you only the trends and explain why I believe they're at significant inflection points... It'll be a lot of information to take in.

I'll sum it up at the end, so you can keep it front of mind as you consider your capital-allocation priorities in the coming weeks.

In my next Digest, I'll sum up the five cyclical trends again, then give you some ideas about how to invest in them.

Each of these trends points very clearly to a whole slew of new investment ideas... and I bet you'll find at least one or two you've never even considered before.

Next time, I'll also include a hint about the easy, one-step, set-and-forget method to exploit all of them with 10 stocks that I'll soon be sharing exclusively with Extreme Value subscribers.

But let's not get ahead of ourselves.

Now, as they say in fox hunting and aerial combat, Tallyho!...

The first cyclical inflection point I'll talk about today is familiar to all regular Digest readers. Given the market action of the past few weeks, you'll certainly agree it bears repeating today...

I'm talking about the Great Bull Market that began in March 2009 during the financial crisis... at the bottom of the bear market. If the Great Bull isn't out of steam already, historical trends suggest it doesn't have long to go...

Since the S&P 500 Index hit its bottom closing price on March 9, 2009, the index has soared roughly 600% through its January 3 all-time high close of 4,796.56... It has been an epic run. If all you did was hold the S&P 500 during those 13 years, you're now looking at seven times your money.

Not bad for doing nothing!

Popular stocks like Amazon (AMZN) and Apple (AAPL) made investors much, much more since the March 2009 bottom ‒ roughly 61 times their money in both cases.

Now, at the other end of that epic run, stocks have recently hit their most expensive levels ever ‒ more expensive than any other time in history, including the dot-com and 1929 peaks.

The easiest way to see this is by looking at the S&P 500's price-to-sales (P/S) ratio. Bloomberg P/S data only goes back to 1990, but that's far enough... since 2000 was the most expensive moment in history until now. The current market valuation of the S&P 500 makes the dot-com peak look cheap...

The chart tells me it's only a matter of time until we enter a bear market or experience some other market action – perhaps a choppy decadelong sideways market, for example – that will kill the Great Bull...

Trees don't grow to the sky and no asset class outperforms forever...

You know what has been happening with stocks recently, but I'll bet you don't know exactly how bad it is already...

It's not even February and the S&P 500 is already having its worst year in nearly a century...

Bloomberg reported that the S&P 500 was down 11% through Monday, January 24 ‒ making this the worst first 15 days in at least 90 years... It could be the worst year ever, but the data only goes back 90 years.

The narrative in the financial press about why stocks have fallen is mostly about how the Federal Reserve will slow its monthly bond purchases and soon begin raising interest rates. Fed Chair Jerome Powell reiterated that message on Wednesday... Stock prices had risen prior to his comments, then fell as he spoke.

To be clear... I don't care about the Fed. Too many people believe it can tweak a multitrillion-dollar economy by printing money and buying bonds. I doubt it can do that, no matter how often it appears to do so successfully...

It couldn't stop the dot-com meltdown or the financial crisis... Investors' deep belief in the Fed's ability to support asset prices will prove to be a huge liability for many over the next few years... Placing too much faith in the Fed could be a big mistake.

When the bull finally runs out of steam, and we all look back... I guarantee you'll see how obvious it was that 2021 and 2022 were just like 1929, the dot-com peak in 1999 to 2000, and the housing-bubble peak in 2007...

If you prepared, you'll be glad you did. If you didn't, you'll be sorry... And you'll be a lot poorer.

The next big cyclical trend that appears to be turning is the value/growth stock cycle...

Value stocks are the cheapest stocks in the market by traditional measures like price-to-earnings ratio, price-to-book value ratio, and price-to-cash-flow value... Growth stocks have the fastest-growing revenues. They're represented by indexes like the Russell 3000 Growth Index and the Russell 3000 Value Index.

The historical cycles are easy enough to see... Growth outperformed in the 1990s until the dot-com peak in 2000. Then value outperformed until 2007. Then growth took over and has outperformed ever since...

You can see these cycles plainly by expressing the Russell 3000 Value Index as a percentage of Russell 3000 Growth Index... At "1.0," they are valued the same. Below "1.0" shows the Value Index is cheaper than the Growth Index...

As the chart shows, value stocks are cheaper relative to growth than at any time since at least 1995... Growth appears to be at the end of an epic run, and value is primed to take over.

As you can see in the next chart, value has moved higher ‒ and almost equal ‒ relative to growth since about mid-November.

We've seen this happen over the last few years for short periods of time... but never has it coincided with the worst start to the stock market in at least 90 years. As investors grow weary of growth stocks disappointing them, they'll retreat into safer, cheaper value names...

And remember, investors usually associate lower interest rates with the outperformance of growth stocks. The higher rates that the Fed is promising will likely create a headwind for growth and a tailwind for value...

Next let's look at a cyclical trend I've never written about before...

Emerging market stocks relative to U.S. stocks...

Emerging markets – small, growing economies in places like Asia, Eastern Europe, and Latin America – became popular in the early 1990s and again during the housing boom, which coincided with a boom in the so-called "BRIC" countries: Brazil, Russia, India, and China. Well, today we might be looking at something like BRIC 2.0...

I spoke with macro investor Marko Papic of Clocktower Group on the latest episode of the Stansberry Investor Hour podcast... Marko is a fan favorite for his ability to express complex ideas in an understandable and engaging manner. He likes emerging markets, too, especially commodity-rich ones like Chile and Brazil.

This cycle looks like the value/growth cycle, as you can clearly see on the following chart, which plots the MSCI Emerging Markets Index (MXEF) as a percentage of the S&P 500 (SPX).

Emerging markets outperformed U.S. stocks through 1993, underperformed them through the dot-com peak, outperformed again until the 2008 financial crisis, and have underperformed ever since... They're as cheap today as they were at the top of the dot-com peak.

Which brings us to the next big cyclical inflection point...

We're talking about commodities compared with stocks.

This chart will look a lot like the last two... Why? It's like I said. All these cycles seem to be reaching inflection points at the same time.

Here's the S&P GSCI Commodity Index as a percentage of the S&P 500...

Commodities went so wild during the Great Inflation of the 1970s that it makes it difficult to see the cycles. So this chart begins in 1987...

Commodities had topped out in 1980 and continued to underperform stocks until the peak of the dot-com boom around 2000... They outpaced stocks until 2011 and have underperformed until around midway through the year 2020, when they bottomed out and began outperforming stocks again.

The inflection point in the commodity/stocks cycle was roughly a year and a half ago, but we're in the early stages of the trend... And as the chart above shows, commodities have plenty of upside potential relative to stocks.

So far today, I've shown you inflection points appearing in the Great Bull Market, the value/growth cycle, the emerging markets/U.S. stocks cycle, and the commodities/stocks cycle...

The fifth cycle ties them together. It puts a tailwind behind value, emerging markets, and commodities... and a headwind in front of the Great Bull Market.

I'm talking about inflation...

The history of the Consumer Price Index ("CPI") – the world's most widely followed inflation indicator – shows that periods of high inflation have been normal ever since the Federal Reserve began operating in 1914.

The chart below clearly shows the turbulent period from 1914 through the post‒World War II peak in 1947... which included several quarters in which inflation was 20% or higher.

You can also see the peaks in 1974 and 1980 when inflation once again reached double-digit levels, followed by the long, slow decline in the CPI since then... Until you get to mid-2021 (below), when it began rising, eventually hitting 7% ‒ its highest level in 39 years.

Inflation is not transitory... The Fed and everyone else have stopped using that term at this point. In his address on Wednesday, Fed Chair Powell said it is no longer necessary for the central bank to try to stimulate the economy.

To that end, it will continue reducing the amount of Treasury bonds and mortgage-backed securities it buys until next month... From then on, it'll buy them at a rate of $20 billion of Treasury securities and $10 billion of mortgage-backed securities per month.

After that, it'll apply a second brake, as it begins to target higher interest rates...

Fed followers and true believers might conclude that Fed-induced higher interest rates will wipe out the inflection points I've shown you, causing inflation to fall and causing value, emerging markets, and commodities to underperform stocks...

In other words, the Fed has already jawboned stocks lower...

It might need only one or two rate hikes to push the market down enough to cause folks to start spending less... The Fed is hyperaware that a rising stock market creates a wealth effect, in which people see their brokerage accounts rising in value, feel richer, and loosen up their purse strings...

Falling stock prices take that away, and folks spend less, whether they actually earn less income or not... It's said that falling stock prices often accompany recessions. But maybe falling stock prices help cause or worsen recessions by eliminating the wealth effect.

I'm more likely to believe that it's a mistake to place that much confidence in the Fed. It strikes me as naïve, first-order thinking...

Second-order thinking might lead you to a different conclusion.

Second-order thinking looks past the obvious... Applying it to higher interest rates might lead the market to conclude that the Fed's fear of inflation is too little, too late.

It makes sense if you think about it.

We've just lived through three decades in which the Federal Reserve helped to inflate three asset bubbles... including the current one, which is the biggest of all.

The last bubble ended in what many folks like Warren Buffett and JPMorgan Chase (JPM) CEO Jamie Dimon say was the near total destruction of the global financial system...

Consider how highly accommodative the Fed has been to financial markets for at least three decades... lowering interest rates and printing trillions of dollars to flood the market with liquidity.

It is hard to imagine that a bunch of bureaucrats committed to such actions ‒ wielding a one-dimensional economic cudgel ‒ can turn on a dime and suddenly become inflation fighters.

A chicken is not a hawk...

People don't change that much that easily.

It's much more likely that we'll get a replay of 2018 to 2019... The Fed raised interest rates a few times in 2018 ‒ and ushered in a near 20% drop in the market from the September highs to the Christmas Eve low.

Then the Fed chickened out and cut rates, ultimately taking them to zero to fight the horrendous consequences brought on by the global COVID-19 lockdowns.

It's hard for me to believe the Fed will keep raising interest rates if the stock market falls 20% or more... They'll chicken out and cut once again.

Not only that, but the Fed's mission, no matter what anyone tells you, is the time-honored mission of all central monetary authorities: to make life easier for powerful people by (gradually or not) debasing the currency.

If you believe history is a guide, you'll have to show me some history that suggests that won't happen to the U.S. dollar... In fact, it is already well underway right now.

As inflation ramps up again, and the Fed fails to quell it through monetary policy, the Great Bull will die... Value stocks will outperform growth, emerging markets will outperform U.S. stocks, and commodities will outperform stocks once again...

It sounds like a massive prediction. I don't see it that way... It's simply an acknowledgement that markets run in cycles and that this has happened before.

And today, the cycles are changing... They are at their inflection points.

If you change with them, you stand a great chance of creating substantially more wealth for yourself over the next five years, 10 years... maybe longer.

Stay tuned for my next Digest for ideas for how to exploit this exciting historical moment in the financial markets...

New 52-week highs (as of 1/27/22): CVS Health (CVS), McCormick (MKC), Royal Dutch Shell (RDS-B), United States Commodity Index Fund (USCI), and Viper Energy Partners (VNOM).

In today's mailbag, we received a few messages from folks who were unable to watch last night's event from Steve Sjuggerud, Dr. David Eifrig, and our Director of Research Matt Weinschenk... If you were one of them, we'd like to pass along good news... You can watch a replay right here.

Good investing,

Dan Ferris
Eagle Point, Oregon
January 28, 2022