Are We Headed Back to the Future?

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Presenter

Will Nasgovitz

Nasgovitz is CEO and Portfolio Manager of the Select Value and Mid Cap Value Funds and their corresponding separately managed account strategies. He also is CEO of Heartland Funds. He has 17 years of industry experience, 13 at Heartland.

Certainly there’s been a lot of volatility in the stock market this summer.

We’ve had things like Brexit, coups, unfortunately more terrorism, and the uncertainty associated with the presidential election that we touched on in an earlier video this year.

In the face of all of this, quite remarkably the market has hit new all-time highs. The S&P 500 hit a new high just this month, and that is quite amazing given:

  • All that backdrop that we touched on, and
  • The fact that there’s been substantial outflows out of actively managed mutual funds, and
  • Sentiment has not been euphoric by any stretch.

So, it makes me think of our late colleague here, Hugh Denison, who always would say, or reveal, or make that statement that when everyone is saying one thing it just cannot happen.

It seems like everyone has been saying we’re going to have a correction, or a bear market, or worse a recession. What do you know? The polar opposite has happened. Thus far the market is hitting new highs.

So what can we look back at to provide some context?

Historically, 1953 and 1983 were very similar. We’re very thankful for our friends at Oppenheimer that had this in their presentation earlier the summer, comparing 1953 and 1983 to the market action today. Ari Wald, their technician put this together. Thanks for just fantastic work.

Pullbacks Preceded Moves Higher

Heartland Advisors Value Investing Market Insight Historical Patterns Chart

Source: Oppenheimer & Co. & Bloomberg L.P., 1/5/1952 to 7/5/1954 for 1953 period; 10/10/1982 to 4/10/1985 for 1983 period; and 5/21/2014 to 8/11/2016 for 2015 period
Past performance does not guaratee future results.

And what’s quite interesting is that these charts are very similar, whether you overlap today with 1953 or 1983:

  • We had a slow down earlier here in the year.
  • Then there’s the December, January, February timeframe, where the market was selling off.

That’s very similar to what we saw in the ’53 and ’83 timeframes. So, what’s interesting in ’53 and ’83? Those were the onsets of secular, or long-term, bull markets for the U.S. stock market. No one’s talking about that. We think that’s interesting.

Perhaps 2013 was the inflection point for a secular bull market here in the United States, or at least for the S&P 500. Could that be the case?

Are there other similarities outside of the technicals today verses those prior time periods?

Certainly interest rates are at low levels, as we know, and back in the early 50s interest rates were extremely low. They were up from what we saw during the Great Depression and during World War II, but at very low levels relative to the historical timeframes. Early 80s: High levels of nominal rates, but real rates were very low, and rates were declining quite remarkably as inflation expectations and inflation was decelerating quite substantially. So, some interesting parallels there.

A Low Rate Environment

Heartland Advisors Value Investing Market Insight Interest Rates Chart

Source: Oppenheimer & Co., Robert Shiller “Irrational Exuberance”, & Bloomberg L.P., 1/31/1928 to 7/29/2016. Robert Shiller Treasury Data used for 1928 to 1961.
Past performance does not guaratee future results.

What’s interesting about today’s market is the breadth. The average stock is starting to perform strongly as well. It’s not just a very narrow market that we saw perhaps in 2015. So we think that is a good sign. We think investors are starting to sniff out the recovery in some of the areas of the economy that have been lagging, whether it’s associated with oil, or precious metals, or the industrial patch that services those areas. So, we’re seeing an improving broader market today, which we think could be a sign of, perhaps, what Ari is talking about or other technicians are talking about. It may be an advent of an earlier secular bear market—or bull market, excuse me.

What would throw cold water on this argument?

Well valuations today, without question, are high relative to the long-term average—and certainly above the levels that we saw in the early 50s or early 80s.

Valuations Look Different Today

Heartland Advisors Value Investing Market Insight Valuations Chart

Source: Oppenheimer & Co. & Bloomberg L.P., 1/29/1954 to 7/29/2016. LTM: Last Twelve Months.
Past performance does not guaratee future results.

That does not suggest, by any stretch, you can’t just rubber stamp it and say that positive forward turns are improbable.

There’s going to be pockets of strength. As Bill, my dad, would always say and continues to say, “There’s always a bull market somewhere.” And that’s what we’re so excited about in today’s marketplace. Despite a dramatic move off the lows in 2009, a very long bull market, we’re still finding opportunities in the marketplace today. So we look forward to updating you on those as the year progresses.

Thanks for watching and enjoy the rest of your summer.

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