Some Thoughts on Assets vs Liabilities, Bear Markets vs Recessions, Inverted Yield Curves, and Holiday Weight Gain

A few charts I came across this week with some thoughts on each:

The bear market accelerates the shift from active to passive:

This trend has been in place for quite some time now but the bear market is accelerating things. This makes sense if you think about it in terms of a year of stock market decline where people with long-term gains are more willing to exit a position to change their portfolio.

Moreover, this is the first time in perhaps an eternity that bonds have experienced a double-digit decline. This year was the perfect time to hit the reset button.

I don’t know how long we can maintain this pace, but passive funds still have some leeway if you look at US stock market ownership:

Passive funds are still relatively small in the grand scheme of things.

I know a lot of people think all this index investing is bad for price discovery, but look at how things were in the 1940s, 50s, and 60s. Individual investors owned 80-90% of the stock.

There were no high frequency trading companies back then. We didn’t need hedge funds to control the markets and fix prices. People were mostly buy-and-hold investors.

And guess what? Price discovery was very good. You didn’t need everyone to swap faces to create a deal.

The good thing about a buy-and-hold approach using low-cost index funds is that you know what you’re going to get – market return minus tiny fees.

The problem for some investors is to sit idly by and weather a market downturn.

Bear markets outside of recessions are relatively rare but not out of the question:

What makes the current iteration so hard to handicap is that we’ve already had a decent sized bear market and yet the recession everyone predicts hasn’t even happened yet.

What if the Fed throws us into a recession in 2023 or 2024 but the stock market has already recouped all or most of the losses? Do we start all over again? Has the stock market already priced this in?

That’s the trillion dollar question. Honestly, I do not know. It probably depends on the severity of the recession, if it were to occur.

Research by TS Lombard shows that no bear market caused by an economic downturn has ended before a recession begins:

“Never” and “always” can be dangerous words in the world of finance.

Things that have never happened before seem to be happening with regularity these days. And past relationships seem to crumble just when you expect them to bear fruit.

One such relationship that many market watchers pay attention to is the spread between long and short bonds. DataTrek Research shows that 2-year treasuries now outperform 10-year treasuries by 0.7%:

This is the widest spread for short-term bonds relative to long-term bonds since the early 1980s (incidentally the last time the Fed went on a rate hike spree).

You can see from the gray bars in this chart that an inverted yield curve has been a reliable indicator of an impending recession in the past.

If we don’t get a recession in the next 12 months or so, that will surprise a lot of people.

We will see.

It should come as no surprise that most people who gain weight do so while on vacation.

My buddy Phil Pearlman made a great analogy between the stock market and gaining weight in his last article on Prime Cuts:

There is a famous line of financial market research that goes something like this.

If you miss the best day of the year in equities, your performance suffers badly in the long run.

Truly bad.

Here’s a variation of it with data from Bank of America describing how you would go from a 17,000% return to a 28% return over 90 years if you missed the ten best days of the decade.

I was thinking how the average adult in the US gains about 1-2 pounds a year.

Maybe that doesn’t sound like a lot, but over 20 or 30 years we’re talking 30-45 pounds.

Of the 1-2 pounds that American adults gain over the course of the year, all of it (and even some of it) occurs during the winter months.

Here is the table to prove it:

I was jealous of that take because it’s so obvious but I had never thought of it that way before.

Avoiding weight gain over the holidays might be even harder than timing the market, but it was a good reminder from Phil that seasonality plays an important role in our waistline growth.

Michael and I discussed all of these paintings and more in this week’s Animal Spirits video:



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Further reading:
4 Regarding personal finance charts

Here’s what I’ve read lately: