Are We Still in a Sideways Stock Market?”

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Are we there YET!

vitaly[By Vitaliy Katsenelson CFA]

In 1976 the Eagles came out with their most successful album, Hotel California, featuring the eponymous single. That song became their claim to fame. Over the next almost four decades the Eagles performed thousands of concerts and they wrote a lot of new songs, but you can’t see yourself going to an Eagle’s concert and not hearing “Hotel California.”  They performed “Hotel California” at every concert and maybe more than once at some. I don’t have the fame the Eagles do, nor do I entertain for a living (unless you call this entertainment).

But, I do feel a little bit like the Eagles when I talk about sideways markets. Let me explain.  I wrote Active Value Investing in 2007, and I followed up with a simplified version, The Little Book Of Sideways Markets, in 2010. Since the books came out, I have given hundreds of interviews and presentations all over the world on the subject.  And just as the Eagles grew sick of playing “Hotel California,” I am sick of sideways markets. When I do interviews now, I politely ask the interviewer to stay away from the topic of sideways markets, as it really bores me.


Bull markets


Now, recently I’ve received emails form loyal readers and reporters asking“I am attaching an article I wrote for Institutional Investor magazine in April 2013 that answers this question.  And if you want to peer deep into the entrails of sideways markets, read this very lengthy article I wrote for John Mauldin’s (must-read) Outside the Box newsletter.  IMAGE Very little has changed since I wrote this article (or the books).

Okay, the Donald and a Democratic Socialist are the lead contenders for the presidency of the US, but otherwise the framework I discussed in the article is much the same.  I could have written the article today, since the data points I used haven’t fundamentally changed – they’ve only gotten more extreme (despite the recent sell-off). The law of mean reversion (i.e., high valuations lead to lower valuations and high profit margins lead to lower profit margins) is still intact.

P.S. Lately I’ve been travelling more than usual.  I just came back from a two-day trip to San Diego, where I attended the Qualcomm analyst investor day.  I could have watched it online (I usually do), but Qualcomm is one of our largest positions and I wanted to be physically present to get a visceral feel for the management.  I’m glad I went.  I will be spending this week in Miami, attending one of my favorite investment conferences (and this time I have a hotel reservation).


In late February a small group of my very close value investor friends is getting together in Denver.  First we’ll visit a few companies, then we’ll ski a few days in Vail and, most importantly, share and debate investment ideas until the wee hours.  We had a similar gathering in Atlanta a few months ago – it was absolutely amazing.


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One Response

  1. “Maybe your weird is my normal. Who’s to say?”
    -Nicki Minaj

    FY 2017

    I’ve had numerous conversations with financial advisors over the last several weeks about the current state of markets and thoughts on asset allocation in 2017. Many of these advisors who use our strategies believe that it’s going to be another strong year. We have a pro-business President, the prospect of reduced regulation and lower taxes, and reflationary hope picking up. The consensus is that bonds will continue to sell-off and we are at the cusp of another major secular thrust for equities.

    When asked if I agree? I give the best answer I can: “I don’t know.” As much as I write and provide market commentary, the (harsh) reality is that my crystal ball is as foggy as everyone else’s. I have no idea if stocks will end the year higher than they are now, but I do feel confident in saying that the cycle is normalizing. The great frustration for several years by active managers has been that historical behavior in what leads a market up or down failed to persist. The hunt for yield resulted in a bull market led by traditionally defensive assets, whereas more cyclical ones tied to growth and inflation lagged. Put simply, risk-off was the way to play risk-on with hindsight.

    Finally, for the last several months risk-on behaves risk-on. High beta and more cyclical names take broad market averages higher. The yield curve steepens on strong up periods for equities, and flattens as equities drop. What is important now is that relationships which active managers relied upon for their portfolio allocations are finally starting to matter again. Yes, the media focuses on the term “normalization” in terms of interest rates, but true normalization goes beyond the cost of capital.

    What excites me about this is that it signals a change in market psychology, and likely allow many forms of active strategies to outperform. We should also expect that there will be true risk-off periods ahead. The question for 2017 is not about whether stocks go up or down. It’s if they do both. And so long as risk-on looks risk-on, and risk-off looks risk-off, I suspect those strategies which thrive in down periods can have a year where active management trumps passive.

    Oh, and to be clear – I cringed when I put that quote in from Nicki Minaj as well.

    Michael A. Gayed CFA
    [Portfolio Manager]


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