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The Muscular Portfolios Newsletter — No. 53 — Mar. 31, 2023
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The market is still bearish
 By Brian Livingston
Equity indexes, such as the S&P 500 and the Nasdaq 100, have large losses and can’t seem to recover back to their January 2022 levels. Since that date, thankfully, the two Muscular Portfolios have outperformed, keeping investors’ losses small and — most important — making the bear market emotionally survivable.
There are signs that the US and world economies are heading into a global recession. No one can predict whether the equity market will hit new lows or somehow magically recover. Your best approach is to continue following an asset-rotation strategy. This formula automatically tilts your portfolio toward whichever asset classes are statistically likely to deliver the best gains in the coming weeks and months.
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Figure 1. The S&P 500 and Nasdaq collapsed 25% and 35% and still haven’t recovered from their 2022 losses. Meanwhile, the Mama and Papa outperformed, with month-end drawdowns no worse than a mild 12% or so. Sources: ETFScreen (SPY and Muscular Portfolios), Yahoo Finance (QQQ).
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Figure 1 shows that the two Muscular Portfolios have protected investors’ money remarkably well from the worst excesses of the equity market. At this writing, the Mama Bear Portfolio is down only 8.8% from the market top on Jan. 3, 2022. That’s not even a correction (a loss of more than 10%).
The equity indexes are currently down 15% to 22% after subjecting investors to crash lows in the fall of 2022. Unfortunately, every time the indexes try to stage a rally, the market peaks and then declines again. The benchmarks fail to achieve the new highs that would confirm the beginning of a bull stage.
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Keep your eyes on the long term and ignore daily moves
I’ve written many times that short periods of one or two years are meaningless to long-term investors. Only complete bear-bull market cycles — and preferably more than one — are useful when comparing investment strategies.
I graph for you some recent histories such as Figure 1 just to show how the two Muscular Portfolios outperform the market. The long-term results in Figure 2 show why they do so.
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Figure 2. Despite the S&P 500’s longest bull-market run in US history — Mar. 2009 to Feb. 2020 — the Mama Bear and Papa Bear Portfolios have outpaced the index for the entire 16¼ years that the prices of actual ETFs have been independently tracked by third parties. Source: ETFScreen performance page.
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Asset-rotation strategies such as Muscular Portfolios can outdo the S&P 500 because these mechanical investing formulas keep their losses small during corrections, bear markets, and crashes.
That not only gives a Muscular Portfolio a mathematical advantage over unmanaged indexes. It also helps investors “stay the course” emotionally and remain fully invested — even during the weakest years of the bear-bull market cycle.
- Getting equity-like returns requires some ups and downs. To reap the rewards of the global market, you must accept periods when most asset classes decline.
- There are no diversified portfolios that avoid all losses during bear markets. Fortunately, you make it all back with market-like returns during bull markets. (We don’t care whether our bull-market gains match any index.)
- The result is success over complete bear-bull market cycles. It’s hard for an index to recover after losses of 30%, 40%, or 50%. The S&P 500 falls that badly every 10 years, on average. A steady course — a portfolio with no crashes — is your best approach.
For a truly long-term perspective — a 50-year projection using the actual prices of asset classes that index funds track — see Newsletter #50.
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There are clear signs that a global recession will begin in 2023 or 2024. This is certain to reduce stock-market returns in the US and around the world:
- Today’s inverted yield curve is the worst since 1981. When 10-year Treasury notes yield less than 2-year Treasury notes or 3-month T-bills, it’s very bad. In the US, a recession has occurred within months after every such inversion going back to 1970, according to financial columnist James Mackintosh (WSJ).
- US manufacturing has declined to a recession-predicting level. “In the past 70 years, whenever manufacturing ISM dropped below 45, recession occurred on 11 out of 12 occasions,” according to Bank of America economist Michael Hartnett (Business Insider).
- For details on these and other signs, see the articles in the paid section of this newsletter.
Recessions usually cause serious bear markets. You need an investment plan that tilts toward non-equity asset classes when necessary. This gives you market-like growth over time but protects you from the S&P 500’s frequent crashes.
For a long-term perspective on such plans, Figure 3 provides statistics on the last 16¼ years of the Mama and Papa. The S&P 500 delivered lesser results.
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The Mama and Papa win on every major metric
Sure, pundits say, a portfolio can outperform the S&P 500 if it takes on more risk than the index. But being riskier is absolutely not true of Muscular Portfolios. The whole point of the Mama and Papa is that they eliminate the S&P 500’s periodic crashes. This gives investors much more predictability and the courage to stay the course.
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Figure 3. The Mama and Papa have higher gains than the S&P 500 total return over the past 16¼ years, with much lower drawdowns and much higher risk-adjusted ratios (the green check marks). Source: ETFScreen.com.
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The actual results over the past several years support the idea of fintech (financial technology). In short, a computerized formula shows us which assets are statistically likely to go up in the next 30 days. The opinions of our impressionable brains can mislead us.
The development in 1993 of exchange-traded funds allows us to receive 99.9% of the return of any index in a single security. This makes great results possible for individual investors who understand a few modern economic principles:
- Economist Harry Markowitz wrote in 1952 that equity markets were “efficient” and, therefore, no one could outperform an index. He won the Nobel Prize in Economics in 1990 for this theory.
- His idea was debunked within a few years. University of Chicago finance professor Eugene Fama showed in 1992 that assets are influenced by “factors.” Fama and his coauthors wrote in 2007, “The premier anomaly is momentum,” and in 2014, “All models that do not include a momentum factor fare poorly.”
- Fama won the Nobel Prize in Economics in 2013 for documenting momentum and other minor factors. That same year, Yale professor Robert Shiller also won for his mathematical proofs of “the failure of the efficient markets model.”
For the complete story on the discredited economic theories of the past — and the latest academic research that has completely replaced those baseless ideas — see the Bonus Chapter of the book Muscular Portfolios.
Individual investors gain clear advantages by using ETFs — rather than unpredictable stocks — and aligning their portfolios each month using a mechanical formula. But most financial talking heads are stuck in the 1950s and still promote the old, crash-prone theory of “buy and hold.”
Fortunately, you don’t need to suffer the market’s heart-wrenching collapses. You have a method that saves you from all that — and the math is computed for you on a completely free website. Enjoy!
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Reader — Please share the tiny URL of this free article: BRI.LI/230331
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—MARK HULBERT, founder of the Hulbert Financial Digest
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