Three ways the dollar dies

The bear gives stocks a respite. But if history is any guide, he's not done yet. Plus, a final excerpt from the upcoming Dollar Report on how useless currencies are replaced. Pay close attention.

Friday, June 23rd, 2022

Laramie, Wyoming

By Dan Denning

It was a nice rally in the indexes this week. The S&P 500 is up more than 5% from its recent lows. And this was only the second positive week out of the last twelve. As Investment Director Tom Dyson and I have both said, you have to be disciplined to avoid bear market rallies. They’re alluring. But this bear market isn’t over:

• The average bear market on the S&P 500 lasts 13.7 months and ends with losses of around 38%. That’s based on data from the eight bear markets since 1973 (a bear market being defined as a decline of more than 20% from the high).

• The 1973 bear market lasted 21 months and resulted in a peak-to-trough decline of 48%. It took 69 months to make new highs. The dot.com bear lasted 31 months, saw a 49% peak-to-trough decline, and took 31 months to make new highs. The 2007 crash lasted 17 months, resulted in a 57% decline, and took 40 months to recover from.

• This bear market, so far, has lasted six months and resulted in a ‘draw down’ of around 20%.

Two other important market notes. The 10-year Treasury Note (price) is down over 10% year-to-date. This is the second worst start for the 10-year (or its nearest equivalent) since 1788, according to Deutsche Bank. The separate States in the Union were still ratifying the new Constitution in 1788. And he French were warming up for their giant national bloodletting in 1789 (the French Revolution.)

Those are interesting coincidences, aren’t they? Extreme monetary instability leads to extreme political and social instability, even of the revolutionary kind. Price revolutions aren’t just a monetary phenomenon. They’re social, and usually violent, too.

More practically, the dismal performance of bonds along with stocks means a conventional 60/40 portfolio would be down about 18% year-to-date. In other words, bonds haven’t ‘smoothed out’ the volatility of your profit and loss. Because bonds and stocks are now positively correlated—they both went up in the QE ear and they’re both going down now—it’s making things harder for investors.

New readers should make sure to take time this weekend to review our Strategy Report. That’s where we cover all the major asset classes—stocks, bonds, cash, gold, real estate, and crypto. You’ll see there why we have zero allocation to bonds in our strategy for 2022.

In the meantime, I got this note from Investment Director Tom Dyson earlier today: