The Risk Of Not Investing

Investors,

The S&P 500 has hit new all-time highs in four of the past six trading sessions, continuing to build upside momentum in a market regime that is still facing a tremendous amount of skepticism.

The fact of the matter is, many of people who doubted the market in December 2022 also doubted the market in March 2023, June 2023, and November 2023.

One of their concerns was the fact that the yield curve (10Y - 3M Treasury yield) inverted in late-October 2022 — a notable recession signal with a perfect track record.

So how has that signal worked out so far?

This chart shows the S&P 500 in the top panel with the 10Y/3M yield curve in the bottom panel, which inverted on October 26, 2022:

Since the inversion, the S&P 500 has gained +27.7% and would need to drop -29% to fall below the 2022 lows. For context, that’s a larger decline than the max drawdown from the November 2021 highs to the October 2022 lows.

In fact, drawdowns of that magnitude are extremely rare.

How rare? Let’s look at the data:

From 1990 to the present day, there were only three drawdowns larger than -30%.

1 every 11.3 years.

Notably, all of these declines occurred during recessions; therefore, we can logically conclude that the S&P 500 will likely only make new lows if we have a recession.

Which therefore begs the question, how does the S&P 500 perform from now until this potential recession and when will that recession come?

What if the S&P 500 gains +12% over the next 18 months and then the recession starts? What if the S&P 500 gains +20% over the next 12 months and then the recession starts? What if it gains 30% over the next 3 years and then the recession starts?

In these scenarios, the probability that the S&P 500 falls below the 2022 lows becomes smaller and smaller. Therefore, even if the yield curve inversion accurately predicts another recession this time, it’s vital to understand that the S&P 500 might not actually make new lows! This is such an important point to understand because it implies that investors have built a degree of cushion if they’ve been buying stocks over the past 12+ months. In other words, due to the strong gains they’ve experienced, the likelihood that their gains get wiped out is getting smaller and smaller.

This highlights the risk of NOT investing and it’s why I entered 2023 saying that I was going to buy equities that year regardless of macroeconomic circumstances:

If you want to read more about the risk of not investing, I’d encourage you to read the post I wrote on X just a week ago.

In the remainder of this report, which will be exclusive for monthly/annual members of Cubic Analytics, I’ll share updated thoughts about current market dynamics and the new data that is shaping my perspectives. As always, these Sunday reports are only available for premium members. These reports act as a personal journal of sorts, providing a window into my brain and how I approach continuous market analysis.

Because market conditions can change on a dime, it’s vital to check the pulse of the market and analyze the blood test. That’s exactly what I do in these reports, in addition to also sharing the weekly buy/sell orders in my long-term portfolio. In total, this report contains 14 additional charts behind the paywall with commentary and a variety of other data points!

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