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Wax On, Wax Off

I watched The Karate Kid last week. It's not the first time I've seen it, but it was the first time I watched it with my two boys - it was so nostalgic for me. By the end of the movie I could see the same energy in my eldest son as when I first watched the movie - a belief, the inspiration, the fight, the triumph.

There is one scene in the movie where LaRusso is very angry with Mr Miyagi:

I'm being your goddam slave! Four days I've been busting my ass, I haven't learned a thing.

Mr Miyagi turns to Daniel and says:

Not everything is as seems.

Here's the scene...

All the training LaRusso has been doing falls into place. Little did he know, Mr Miyagi has been teaching LaRusso the fundamental principles Daniel needs in karate.

The stock market has regained nearly three-fourths of the ground it lost last year. Some investors have bailed on their game plan, some have questioned it, and others have stuck to it. Bear-market rallies don’t retrace much more than half their preceding decline. When they do, they are usually new bull markets. I wrote about this about a month ago, you can read it here.

Here's Jurien Trimmer of Fidelity Investments:

With our current 73% retracement, history seems to be on the side of the bulls here. The market has now spent a year-and-a-half bucking the long-term uptrend. That’s a long time.

Following the recent price gains, the S&P 500 index is a mere 6% below its all-time high of 4,818. From the October 13 low, the SPX is now up 26%.

Where stocks go from here depends largely on earnings: So far only 36 companies have reported 2Q results, but 86% of them beat estimates, by an average of 9.1%. If Q2 follows in the footsteps of Q1, we should see a solid pickup in the growth estimate in the coming few weeks.

What about recession fears? Well, history suggests recession is still coming, perhaps in early 2024. The yield curve has never been wrong, but it has been early, as it appears to have been this time.

For now, the economy is still making strides, in part, perhaps, because the Fed’s attempt to put the squeeze on liquidity has proven to be feeble: With the dollar weakening and equities rallying, financial conditions have now loosened all the way back to the spring of 2022 levels, when the Fed had barely begun tightening.

Inflation is cooling, but the market continues to price in near certainty of another rate hike later this month, and possibly another one in the fall. Even using trailing inflation, real rates seem to have entered the restrictive zone. This suggests that the Fed is in the 8th or 9th inning of its tightening campaign, giving the equity bulls some hope that there is light at the end of the tunnel.

2022 challenged us all, every instinct in our bodies was telling us to do the opposite of what our head would have been telling us to do (if we gave it a chance).

It can be hard to see the forest for the trees. Investors are challenged every single day from all angles. Do they play the long-game or do they capitulate? Do they change direction or stay the course? For those who have been able to play the long game and stay the course, the market is rewarding you. There are no free rides in investing. The downside is the price of admission. You don't get the upside without the downside.

Like karate, there are fundamental principles investors need to understand, learn, and practice. This is your karate kid training. And in investing, like the karate kid, not everything is as it seems.


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