John Clements on stocks 2022

[Chuckanut]

FYI, John confesses to his investment sin. And then defends his actions.

https://humbledollar.com/2022/10/my-investment-sin/

Jonathan Clements | Oct 15, 2022
I’LL CONCEDE IT’S HARD to justify—but I don’t believe it’s 100% unjustifiable. At issue: my strategy of overweighting stocks during big market declines. I did so in 2007-09 and early 2020, and I’m doing so today.

“Market timer,” cry the critics. That, in financial circles, ranks as pretty much the nastiest insult you can hurl, even worse than calling someone an “annuity salesman.”

Today, if I ignore the money I’ve set aside for a big home remodeling project, my Vanguard Group account is at 86% stocks, above my 80% target. I started the year at 78%. Since then, I’ve been regularly moving money from my short-term bond funds to my stock funds, so I’ve not merely offset 2022’s fall in share prices, but also driven my stock holdings six percentage points above my target.

All that money has gone into total stock market index funds. I’ve also converted $80,000 of my traditional IRA to my Roth, effectively increasing my stock exposure when calculated on an after-tax basis. Even as I try to make the most of 2022’s stock market slump, I can’t say I’m thrilled about my losses. But I also know I won’t be tapping my portfolio for income for at least a few more years. How can I justify this sort of active asset allocation? Let me offer three contentions.

 

[tulak]

I'm a fan. I agree with:

In other words, if stocks fall 25% this year, that makes no difference to the odds of whether they’ll fall 25% next year, and the year after that, and the year after that.

I think this is nonsense. Yes, what happens to stocks on Monday tells you nothing about what will happen to share prices on Tuesday. But if share prices fall for years on end while corporate earnings keep growing, eventually stocks will become an unbelievably compelling value. What if, instead of growing, corporate earnings shrink year after year? In that case, something disastrous is happening in the world—and, frankly, it won’t matter what you own.

Which is why I've been buying equities as much as possible.

There was a graph in Fortune (or Forbes) that sums it up well too. It showed the ten year market returns after a major down turn. I can't find it right now, but will post it if I can find it.

 

[tulak]

I found the chart, but it's behind a paywall on Fortune's site. I was able to get to on Apple News (I have a subscription). For those that have access: https://fortune.com/2022/10/13/investing-stock-market-outlook-rebound/

The only bad decade was after 2000, with 38% for 10 years. 2008 didn't help. Otherwise every other 10 year period had gains between 100-400%.

 

[foxcreek9]

I found the chart, but it's behind a paywall on Fortune's site. I was able to get to on Apple News (I have a subscription). For those that have access: https://fortune.com/2022/10/13/investing-stock-market-outlook-rebound/

The only bad decade was after 2000, with 38% for 10 years. 2008 didn't help. Otherwise every other 10 year period had gains between 100-400%.

You can see it for free

https://archive.ph/FNUA5

 

[razztazz]

It's market timing without waiting for an actual bottom. Just waiting till it's "down enough." A chartist without graph paper.

 

[Chuckanut]

Interestingly, the stock market has climbed quite a bit over the last two weeks.

I have no idea what will happen next. I think it's interesting that it has happened while this illustrious group along with many others is so focused on bonds.

 

[audreyh1]

I think the equity market is thinking that inflation has peaked, the Fed is getting closer to the end of their rate rise path and companies and economy so far remain robust.

We’ll see what reactions are on Nov 2.

 

[kevink]

Really good interview with Jonathan. I admire his fortitude (70-80% equities at age 60) and minimalism (Vanguard’s total world stock ETF VT, half each short-term TIPS using VTIP and short-term Treasuries in VGSH for fixed income).

http://https://youtu.be/4BIklj0CPX4

 

[VFK57]

Last two weeks were good for the stocks but I think it is temporary and keeping 86% of portfolio in stocks is rather high exposure in uncertain time:
1. The war in Ukraine is far from over and only G.d knows where it is going to lead to
2. The inflation is still high despite sharp increase in rates.
3. Continuation of rates increases will surely harm the economy.
4. The stability of high oil price also does not help, on the top of it Saudis refused to pump more oil and implement cuts in production. If oil prices will go higher, we surely will be in recession much sooner.

 

[VanWinkle]

I increased my equity percentage in 2020 and am doing so again this year. It is a fairly minor increase of 5-10% of my overall asset allocation. This keeps my equity allocation dollars level during the decline and makes the recovery time shorter. Is there more risk- maybe, but with evaluations lower now I think a 60/40 risk now is about equal to a 50/50 risk at high evaluations of 2021.

 

[VanWinkle]

Last two weeks were good for the stocks but I think it is temporary and keeping 86% of portfolio in stocks is rather high exposure in uncertain time:
1. The war in Ukraine is far from over and only G.d knows where it is going to lead to
2. The inflation is still high despite sharp increase in rates.
3. Continuation of rates increases will surely harm the economy.
4. The stability of high oil price also does not help, on the top of it Saudis refused to pump more oil and implement cuts in production. If oil prices will go higher, we surely will be in recession much sooner.

All of this seems to verify his take on the market. Sentiment is poor now, and will get better in the future. I agree that 86% equity is too high for me and you, but maybe it works well for him.

VW

 

[Markola]

“I’ve been regularly moving money from my short-term bond funds to my stock funds, so I’ve not merely offset 2022’s fall in share prices, but also driven my stock holdings six percentage points above my target.”

Regardless of one’s allocation target, if one is holding safety reserves (cash, short term bonds, etc.) during bull markets then converting them to stocks during bear markets, then back to cash, and round and round, it nets out. One might as well have maintained one’s target allocation throughout the cycles. The evidence is, the fully-invested person would likely do better than the market timer, who would accrue trading fees, maybe taxes and, most likely, timing mistakes.

 

[Chuckanut]

Jonathon Clements was interviewed on Wealthtrack about two weeks ago.

Clements will give us his perspective on the much-changed financial climate we find ourselves in, and offer portfolio and financial planning adjustments for rising interest rates and inflation.

 

[Montecfo]

I think he is early.

 

[NW-Bound]

Really good interview with Jonathan. I admire his fortitude (70-80% equities at age 60) and minimalism (Vanguard’s total world stock ETF VT, half each short-term TIPS using VTIP and short-term Treasuries in VGSH for fixed income).

http://https://youtu.be/4BIklj0CPX4

I did not know of Clements until this thread, and just found out he's 67.

My usual stock AA is the same range as that, and I own mostly individual stocks and sector ETFs. No indexing here.

I think he is early.

I concur.

Just lowered my stock AA to below 60%. Most likely will go lower before I go back up to 80%.

 

[Montecfo]

I did not know of Clements until this thread, and just found out he's 67.

My usual stock AA is the same range as that, and I own mostly individual stocks and sector ETFs. No indexing here.



I concur.

Just lowered my stock AA to below 60%. Most likely will go lower before I go back up to 80%.

Yes. My bat has stayed on shoulder. Waiting for the proverbial fat pitch.

We had PE multiple contraction, but earnings decline has barely begun.

Also I thought his advice to "stick with your allocation" while increasing his seemed a bit of doublespeak.

 

[NW-Bound]

Goldman Sachs just cut S&P 500 earning estimates for 2022, 2023, 2024. The earning growth for the 3 years are 7, 0, and 5%, meaning next year will be flat.

I don't sell my shares outright, but try to squeeze some more gains by writing OTM calls. This may result in me losing the strong stocks while keeping the weak ones, but I am willing to take this risk.

About Clements increasing his stock AA while advising keeping it the same to other people, I don't see anything wrong. It shows he's more daring and bullish than mere mortals.

 

[Lsbcal]

Is Clements total financial picture known? And is it in any way similar to mine?

I think one needs to know this before being influenced by another investor. No matter how highly one thinks of their acumen.

 

[intent]

Goldman Sachs just cut S&P 500 earning estimates for 2022, 2023, 2024. The earning growth for the 3 years are 7, 0, and 5%, meaning next year will be flat.

Out of curiosity, what were GS's three year estimates last year at this time - for 2021, 2022, 2023?

I'll see if I can Google it myself, but thought I'd ask in case you know off hand.

 

[NW-Bound]

One year ago, GS estimated 2022 earnings to be $226. With just 2 months left for 2022, it now says $224.

Back then, it said 2023 earnings to be $234. Now, it says $224, same as for this year. That's a reduction of -4.3% from the earlier estimate.

For a reference point, the actual S&P earnings in 2021 was $211.


PS. The above number shows an earning increase of 6% from last year to this year. However, that's in nominal dollars. After inflation, that's a slight decrease.

 

[VanWinkle]

I did not know of Clements until this thread, and just found out he's 67.

My usual stock AA is the same range as that, and I own mostly individual stocks and sector ETFs. No indexing here.



I concur.

Just lowered my stock AA to below 60%. Most likely will go lower before I go back up to 80%.

Do you find that you are beating the long term buy and hold Indexers with the
same risk profile? How much time are you spending on the individual stocks, options, and allocation adjustments? Are taxes ever included in you return figures?

Thanks for any insight,

VW

 

[Lsbcal]

Hey VanWinkle, I'm not NWB but my insight would be "it all depends". Depends on the quality of your methods and probably cannot be reproduced since any method is by definition market time dependent. Even buy-hold depends on when you get in and what you get into and what AA you choose.

 

[intent]

One year ago, GS estimated 2022 earnings to be $226. With just 2 months left for 2022, it now says $224.

Back then, it said 2023 earnings to be $234. Now, it says $224, same as for this year. That's a reduction of -4.3% from the earlier estimate.

For a reference point, the actual S&P earnings in 2021 was $211.


PS. The above number shows an earning increase of 6% from last year to this year. However, that's in nominal dollars. After inflation, that's a slight decrease.

Much appreciated.

I'm not sure what to make of these numbers, but you are awfully nice to provide them.

 

[NW-Bound]

Do you find that you are beating the long term buy and hold Indexers with the
same risk profile? How much time are you spending on the individual stocks, options, and allocation adjustments? Are taxes ever included in you return figures?

Thanks for any insight,

VW

Well, it's a bit too early to tell because things may change anytime, and I may jinx it by showing it here. But so far, it's OK for the 3 years that I became a lot more active with writing OTM covered calls and puts.

I spent 2 or 3 hours each day during market open hours to look for opportunities to sell something (I never buy options, only sell them). Outside of the market hours, when I read economic news, I try to ask myself how that is going to impact the companies whose shares I own. How do I account for that time reading the news, because it's something I do whether I am an active investor or not?

No, no tax as I trade mainly in tax-deferred accounts.

Here's what my brokerage shows, for the accounts that comprise of 72% of investable assets. The stock AA during the 3-year period of the chart below varied in the range of 60-80%. Right now, it's at the low end of the range.


PS. I just recall something. The stock AA is what Quicken shows me, but that number encompasses all accounts, not just the 72% in the actively traded accounts. The accounts not included in the chart below have lower returns, such as our I bond accounts for example, and also the taxable accounts which I do not trade.

So, I compute the return for all accounts as tracked by Quicken. It's 41.2% over all accounts for the trailing 3-year period, compared to 53.4% for the actively traded accounts.

 

[NW-Bound]

Much appreciated.

I'm not sure what to make of these numbers, but you are awfully nice to provide them.

Well, GS estimates of the earnings concur with other pundits that the S&P will face some headwinds in 2023. The earnings will stay flat, but with a high inflation, it means a decrease of 6-8%.

What does that mean for the stock market? I think that's tougher to predict, as investors always look ahead.

For example, the earnings for 2022 are going to be a bit better than those of 2021, but still the market got pummeled. Investors are already discounting the lack of growth in 2023.

PS. No. The earnings for 2022 are 6% above 2021, but only in nominal dollars. After inflation, that's flat to slightly down.