Why The "I Need Income" Approach May Produce Extremely Disappointing Returns

TOTAL RETURN IS A MORE PRUDENT APPROACH

Obviously, it is reasonable to be concerned about generating income from your investments in retirement.  However, as shown in this week's video, in the current environment it may be vitally important to shift from a "I need income" mindset to a "I need to protect and grow my assets" strategy.   The video walks through a historical example using the actual performance of an "income- generating" portfolio.  

History Says Rising Rates Are Bullish For Stocks

OTHER VOICES

In recent posts on rising bond yields and a bull/bear eye test, we noted rising bond yields are typically associated with bull markets and an improving economic outlook.  From time to time, it is helpful to hear the message from other sources. From MarketWatch:

How big of a headwind do high rates really represent? According to equity analysts, not big at all. In fact, they may even be a positive. Despite the recent turbulence, historically, “equities have gained significantly in periods of rising rates,” wrote Jodie Gunzberg, managing director and head of U.S. equities at S&P Dow Jones Indices, in an email. “Since 1971, the S&P 500 has gained about 20% on average in rising rate periods, has gained 8 of 9 times and has gained nearly 40% twice, with less than a 4% loss for its worst rising rate period.” Gunzberg’s analysis evaluated the benchmark U.S. index on a total-return basis.

From CNBC

"I want everybody to sit back, relax and let's look at this history," Acampora told CNBC's "Futures Now" on Tuesday.  He picked out a chart that he says proves the case.

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"Stare at the lower left-hand corner of that chart carefully," said Acampora. "Look at the years between 1948 and 1962. Guess what — rates started turning up. Look at the chart up above it, the stock market went up. In other words, you can have rising stock prices with rising interest rates."

"There'll be a lot of volatility," added Acampora. "But, the secular bull market is alive and well. I think you've got years left even with rising rates."

S&P 500: NORMAL PULLBACK

Fibonacci retracements help us understand what a normal pullback typically looks like within the context of an established uptrend.  Even if we examine a relatively short timeframe dating back to August 2017, the S&P 500 remains near the typical retracements of 38.2%, 50.0%, and 61.8% of the prior A to B move.   If the trend remains in place, we would expect the S&P 500 to eventually make a higher high above the previous high, which is what bullish trends do by definition. 

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If the levels above fail to hold in the coming days and and weeks, the bears will have taken a small baby step in relation to the bigger picture evidence outlined in the video below.

WHY EVERYTHING YOU KNOW ABOUT STOCKS AND BONDS IS ABOUT TO CHANGE

This week's video asks what can we learn about the stock market's long-term risk-reward profile by studying three charts:  (1) S&P 500 vs. 30-YR Treasuries, (2) Value Line Geometric Index, and (3) the NASDAQ.

Why Everything You Know About Stocks And Bonds Is About To Change

STOCKS VS. BONDS – THE SINGLE BEST SIGNAL

This week's video asks what can we learn about the stock market's long-term risk-reward profile by studying three charts:  (1) S&P 500 vs. 30-YR Treasuries, (2) Value Line Geometric Index, and (3) the NASDAQ.

INVESTING FOR INCOME IS A WHOLE NEW BALLGAME

All instruments that pay dividends have bond-like characteristics, including preferred stocks, MLPs, and REITS.  Therefore, the concepts in this week's video impact all yield-oriented or income-oriented investments. 

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Why Tech Stocks Could Rise For Many Years

STATUS OF THE NASDAQ'S LONG-TERM BREAKOUT

Between points A and B in the chart below, the tech-heavy NASDAQ experienced numerous bouts of emotionally-draining volatility.  The same A to B period featured a secular trend that lasted 16.66 years and posted a hard-to-comprehend 1,513% gain.

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Since the latter stages of the 16.66 year move checked every "this looks like a bubble" box, it is not surprising the market had to consolidate its gains, which is exactly what happened over the next 16.66 years.  Between points B and C, the NASDAQ went absolutely, positively nowhere before breaking out of the massive and multiple-year consolidation box in late 2016 (above point C).

THE LONGER A MARKET GOES SIDEWAYS

Regular viewers of CCM's weekly videos are familiar with the expression, the longer a market goes sideways, the bigger the move we can expect to get after either a bullish breakout or bearish breakdown.  Prior to completing the 1991-2000 leg of the secular move, the NASDAQ went sideways for 3.8 years. Prior to breaking out and successfully retesting the breakout in 2016, the NASDAQ went sideways for 16.66 years (see chart below).

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MORAL OF THE STORY

The moral of the story is market fractals tell us it is in the realm of possibility the NASDAQ could rally for a period much longer than the human mind can easily comprehend and the magnitude of the gains could be extremely satisfying.  If you have studied charts for years, the previous sentence is not really even debatable; it is the message from the present day charts.   

PROBABILISTIC STATEMENTS BASED ON FACTS

We are simply making statements about the probability of good things happening relative to the probability of bad things happening over the next 5 to 20 years.  If the facts in hand and charts change in a meaningful way, the assessment of the probabilities must be adjusted as well.   We will continue to take it day by day, remaining open to all outcomes, from wildly bullish to painfully bearish. 

YOU ARE OUT OF YOUR MIND

If we were working on Wall Street in 1990 and called a group of coworkers and clients into a conference room and said...

"The NASDAQ WILL gain 940% over the next nine years"

...you would have been laughed out of the room and told to get some help.  And yet, that is exactly what happened between points E and F below.  Skepticism is part of the early stages of a secular trend script.  We are supposed to be skeptical with chart patterns like the one shown below.  It is logical to be skeptical after the NASDAQ disappointed us for 16.66 years.

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WHAT ABOUT?

The market considers all topics on all timeframes.  Therefore, every single "what about" question is reflected in the charts above.  

  • What about valuations?  Click here
  • What about the fact that stocks have gone up for 9 years? Click here
  • What about the health of the bull market in light of recent volatility? Click here