Get Your Four Fingers up in the Air, and Wave Them Around Like you Just Don't Care
Financial Fridays - Week 40, 2022 - After a horrible three quarters for the markets, we have now entered the fourth quarter where we should see the markets finish the year strong.
(10-minute read)
CARTOONS OF THE WEEK:
Hold Up Your Four Figures - It’s Fourth Quarter Time!!!
During the 1960s, the Oklahoma Sooners Football Program had a coach named Buck Nystrom.
In the off-season, while the head coach and position coaches would be traveling trying to recruit more talent, Buck would be responsible for the team's off-season workout program.
In the late 1960s, Buck wanted to start a new tradition for their off-season workout program. Instead of the normal stretching and calisthenics training they did in the past, Buck wanted to implement a station program.
Since the previous season was loaded with late-game failures, Buck felt the player’s conditioning and focus were not there at the end of the game.
So this off-season, he implemented eight training stations on the field, having four players in each group who would visit each station for a certain period of time, then move on to the next station, with minimal to no breaks. Each station focused on something different but they all were geared toward technique, quickness, and conditioning.
Buck would later call this new program the Fourth Quarter Program.
As Buck outlined his thoughts on the new program.
"Look at your average game of football. Four to six seconds per play. Seventy plays per game. That’s between 280 and 420 seconds of hard-nosed football that I need you to win a game.”
"And when that fourth quarter comes, and everyone is tired, and everyone is hurt, the player who worked the hardest in the offseason is going to win."
To reinforce this with his players, he asked them to establish a simple ritual before rotating stations.
"Break down. Clap three times. Then hold up the four fingers."
Some feel this was the first time the four figures were used to represent the fourth quarter of a football game. The quarter where all your hard work during the off-season pays off. The quarter where no matter what happened in the first three quarters, you would finish the game strong.
“There will be no quiet, no matter where we are in the game, we will bring it back in the fourth quarter.”
Miami Hurricane Season Ticket Holder “Mark”
Today, you can see the tradition of holding up four figures at the end of the third quarter in almost every stadium that hosts a football game. From Jr. Fly kids aged 5-7 to NFL players getting paid millions to play the game.
At the University of Miami, this tradition was voted as the top tradition at the school, as highlighted below in this video.
As stated by Buck, and many coaches and fans since the 1960s, no matter how we have done in the first three quarters of the game, our goal now is to finish strong.
As we enter the fourth quarter of the year, many of you feel that all we want now is for the markets to finish strong.
The good news is the fourth quarter is the market’s favorite time of the year. No matter what has happened in the market from January to September, the market always looks to finish the year out on a strong footing.
It Has Been a Very Difficult First Three Quarters
The first three quarters of 2022 have been brutal. Just take a look at the returns this year through September.
Green shaded areas are US market indexes, yellow are international market indexes, and gray are bond market indexes.
As you can see, the only place to have made money this year is in cash (US T-Bills 1-3 months). This goes along with the recent comment from Citibank strategist on Bloomberg back in September.
Just like any given Sunday where a team that is less gifted can beat a much better team, 2022 has shown those who felt the market was a darling that only went up, that it can also go down just as fast.
The 2022 market returns have felt worse than almost anything I personally can remember.
Usually, when football teams play poorly, the first thing the coaches and players do is review the game film. Their goal is to see what went wrong and more importantly, how can it be fixed.
In our review of the markets film through the first three quarters of this year, we see records being broken everywhere. And not in a good way.
This was the first time since the recording of bond and stock market data that we saw both bonds and stocks down together three quarters in a row.
I discussed this with many of you this year in our meetings. Seeing both stocks and bonds down in the same quarter has happened only 10% of the time since 1976.
Seeing both down two quarters in a row is even rarer. It has happened only a few times since 1976.
But we have never....Let me repeat....We have NEVER seen both stocks and bonds down together three quarters in a row until 2022!!!
Think about that for a moment. Of all the world events that have happened in the market since World War II, we have never gone through what we have just experienced.
And why are we seeing record losses across the board now?
Well, we just went through one of the best 10 years in history to make money. With ultra-accommodative central banks printing endless amounts of money, everything went up in value.
And now, we are seeing the reverse of this. And fast.
As seen below, we have just experienced the fastest tightening of monetary policy (think Fed rate hikes) in history. And we are not over yet!!!
This is all because of a record rise in inflation (cost of goods).
Below is an interesting chart looking at just the core items we spend our money on each month like gas, utilities, food, housing, and electricity.
As you can see, we are at record levels of price increases, outpacing even what we have seen in the 1970s.
With the rapid rise in prices, the Federal Reserve and other central banks around the world have turned off the free money sign and now want to collect everything they gave away over the past 10 years.
As a result, we are seeing money growth (below measured by something called “Real M2”) contract the sharpest since 1980!!!!
The main goal, as we have discussed many times, is to make you feel poorer.
It starts with the markets. We highlighted above the records we have broken this year. Below is another one.
You, Mr. and Mrs. US citizen, lost almost a record amount of money (measured in net worth) this summer over a 3-month period than any other time since World War II.
When it comes to stocks, back in July, we had whipped out record levels of wealth. Since then, most stocks have moved lower compounding the losses highlighted below.
Historically during these types of downturns in stocks, bonds usually hold their value.
Well, 2022 has been different. As you can see below, bonds around the world have entered a bear market ( a drop of more than 20% on average) taking away any potential for investors to have a “safe haven” for their money.
We have seen (and will continue to see) record housing price drops.
We have seen a huge drop in used car prices, which will hurt a ton of car dealers as we move into the fall.
Below is just one of many snapshots of dealers who will have to go through some real pain as prices adjust.
And when we look at manufacturing, things continue to get worse.
So it seems like the Fed’s plan to make you feel poorer is working.
But there is that little thing out there that continues to be a pain in the Fed’s backside.
That little thing is US unemployment.
If you recall, we had a good rally in the markets in July. Many thought we have seen the worst of the market returns and many were feeling optimistic as we entered August.
Then the below data was released.
Usually, this would be seen as a positive, as good employment growth is good for the economy and markets. After all, when everyone is employed, that means everyone has money to spend on stuff, which pushes the markets and economic activity higher.
But as we have already highlighted, 2022 is anything but normal.
Because jobs are still so strong, the markets are factoring in higher rates and more tightening by the Federal Reserve.
Why?
Because when employment stays strong, we can potentially get an “inflationary wage spiral”.
What is that?
It is when inflation moves from goods (think stocks, bonds, housing, food, energy, etc.) to services and wages (IE your paycheck).
Historically when inflation moves into wages and services, it becomes much more sticky (harder to fight and get rid of).
And that is exactly what happened when we saw the August inflation data, as highlighted below.
Now we have a Fed that will do everything in its power to control this more “sticky” inflation.
Hold Up Your Figures, It’s the Fourth Quarter
This past week we have seen some interesting headlines.
The first came from the United Nations, of all places, telling the world central banks to PLEASE stop raising rates.
After this, we saw the IMF (International Monetary Fund) also release a statement asking the Fed to consider the impacts of their rate hikes on the rest of the world.
Do they know something we don’t know?
Last week we saw the UK pension plans needing emergency funding from the Bank of England, as we discussed HERE.
Is there something else out there that is on the brink of collapse?
In any event, on the news from the IMF and UN, along with the news from the Bank of Australia (below), the market had a “rip your face off” rally this week.
As you can see below, there have been only a handful of times we have seen the markets rally 2.5% or more two days in a row.
What a way to start the 4th quarter!!!!
But just like a game where it seems the refs are paid off for your team to lose, here comes the Fed officials to throw their flag on the play and do everything in their power to get the markets moving lower again.
First was Mary Daly….
Then Kashkari….
The good thing is we have history on our side. We should finish out the fourth quarter strong like our coaches expect of us…
As you can see below, the 10 worst starts to the year through the 3d quarter and how we finished up that year in the fourth quarter.
Out of the ten periods highlighted above, only 2008 finished in the red for the fourth quarter.
Conclusion
We should be optimistic about the fourth quarter.
This is not to say the markets have made their lows and for you to take risk now.
What I am saying is for 2022, we have probably seen the worst in the markets.
History tells us we should finish the year strong.
Looking into 2023, the story will continue to be the same.
We will not see an end to rate hikes until one of the three events below happens.
1. US unemployment rate moves significantly higher
2. We see inflation move lower then the Fed’s interest rate and stay there for months.
3. Something, somewhere, blows up
One of these events will probably happen in the first half of 2023.
The Fed, along with all other central bankers around the world, are hoping it will be point #2 above.
If it is point #1 or point #3, the pain will get more intense before it gets better.
The key point though is that it will get better.
We just need to wait for the refs (ie Fed) to be on our side, or at least not to continue to fight us on every small market rally we see.
Have a great weekend…..
Hi, so what scenario is your privilegied one ?
By the way, very good article as usual.