Long-Term Bullish (EP.277)

Episode Summary

Executive Summary: The episode argues that the market selloff and recession fears are creating long-term opportunity, not just short-term pain. The hosts cite historical drawdowns, breadth washouts, rising bond yields, and shifting flows as evidence that stocks may be attractive once down 25%+ and that bonds are finally yielding enough to matter. They also discuss Fed tightening risks, UK pension stress, housing affordability, and several earnings reports that show post-pandemic normalization.

Main Topics: Bear-market optimism and historical equity returns (Priority: 5/5): The hosts highlight historical evidence that buying after major drawdowns has led to strong one-, three-, five-, and 10-year outcomes, arguing investors should think long term even if another leg lower is possible. Market breadth washout and technical signals (Priority: 4/5): They discuss how few stocks remain above their 200-day moving averages during market stress, framing it as evidence of a broad washout that has historically preceded better forward returns. Druckenmiller, lost decades, and return expectations (Priority: 4/5): The episode examines Stanley Druckenmiller’s view that the Dow may not be much higher in 10 years, then counters with the idea that the current century has already included weak returns and multiple bear markets. Bonds, 60/40 portfolios, and higher rates (Priority: 5/5): They argue that bonds are finally investable again with yields around 4% and that a traditional 60/40 portfolio may now offer better prospective returns than it did during the zero-rate era. Fed policy, recession risk, and financial stability (Priority: 5/5): The hosts debate whether the Fed will keep hiking into a recession, citing UK gilt-market stress, the Bank of England intervention, and concerns that rapid hikes are breaking things. Earnings normalization in consumer and industrial companies (Priority: 3/5): Nike, CarMax, Tesla, DocuSign, Apple, and others are used as examples of companies facing inventory, valuation, or demand normalization after pandemic-era distortions. Housing affordability and rate-sensitive markets (Priority: 4/5): They discuss how higher mortgage rates have sharply reduced affordability, lowered the number of households qualifying for mortgages, and may pressure housing demand more than prices.

Key Arguments: Buying broad equity indexes after 25%+ declines has historically led to strong subsequent returns, even when more downside remained. Market breadth collapses and high drawdown periods usually happen for real reasons, but those are often the best long-term entry points. Druckenmiller-style long-term pessimism is possible, but the market has already delivered a lost decade-like environment since 2000. Bond yields around 4% make fixed income meaningfully attractive again; unlike in the prior decade, bonds now actually provide income. If rates fall back to 1%-2%, it would likely signal a bad recession; holding rates in the 3%-5% range may be healthier for diversified investors. The Fed is raising rates fast enough to risk breaking parts of the financial system, as seen in UK pension LDI stress. Housing affordability has deteriorated dramatically because rates have risen faster than incomes and home prices can adjust. Many corporate earnings problems are post-pandemic normalization stories rather than permanent business collapses. Consumer goods, autos, and tech companies are facing inventory corrections, weaker demand, or valuation compression after huge pandemic-era gains.

Data Points: S&P 500 drawdown: Down 25% from all-time highs - The hosts frame this as a major bear-market threshold and use it for historical return analysis. S&P 500 future return after 25% drawdown: Average 1-year return over 20% - Historical total returns starting the month after the index first fell 25% from highs. S&P 500 future return after 25% drawdown: Average 3-year return almost 40% - Same historical study after 25% drawdowns. S&P 500 future return after 25% drawdown: Average 5-year return over 80% - Same historical study after 25% drawdowns. S&P 500 future return after 25% drawdown: Average 10-year return over 200% - Same historical study after 25% drawdowns. NASDAQ drawdown: Down 30%+ - Used in a parallel historical return analysis for the Nasdaq. Russell 2000 drawdown: Down 30%+ - Used in a parallel historical return analysis for small caps. Washout breadth events: 219 times - Instances when less than 15% of the S&P 500 was above its 200-day moving average. Worst forward 1-year outcome after breadth washout: S&P 500 down 12% - Only 2001 produced a worse one-year outcome among the cited breadth washouts. Dow forecast: Could be not much higher in 10 years - Attributed to Stanley Druckenmiller’s bearish long-term outlook. S&P 500 real returns since 2000: About 6% per year - Used to argue the current century has already been challenging for investors. S&P 500 real returns in prior 20-year period: About 16% per year - Used in contrast to show the late 20th century was easier for investors. Bonds real returns since 2000: About 4% per year - Part of the comparison of asset class returns this century. Cash returns since 2000: About 1.4% per year - Used to show the low-return backdrop of the post-2000 era. Projected return to January 2022 peak in 4 years: 9.4% CAGR - From JP Morgan’s guide to the markets. Projected return to January 2022 peak in 3 years: 12% CAGR - From JP Morgan’s guide to the markets. Projected return to January 2022 peak in 5 years: 8% CAGR - From JP Morgan’s guide to the markets. Picasso auction turnover in 2021: $293 million - Referenced in the Masterworks sponsor discussion. Picasso all-time record painting price: $179 million - Referenced as the all-time record for a Picasso painting. UK 30-year government bond move: 5% intraday, then ~3.8% next day - Example of severe market dislocation during the UK gilt crisis. Nick Majuli breadth sample: Less than 15% above 200-day MA - Technical measure used to identify a complete market washout. Chicago PMI: 45.7 - Cited as a recessionary signal; only one prior non-recession reading at that low level. Households expected to sell equities: $100 billion in 2023 - Goldman Sachs estimate cited for a shift from stocks to bonds. Home affordability at 20% down and $2,500 monthly payment: $760,000 at low-rate cycle vs $476,000 now - Shows how higher mortgage rates reduce purchasing power. Households no longer qualifying for a median-price home mortgage: 18 million fewer households - Oxford Economics estimate with 30-year mortgage rates near 7%. CarMax retail unit sales: Down 6.4% - Quarterly results reflecting a normalization in used-car demand. CarMax used unit comps: Down 8.3% - Same earnings discussion. GM dealer inventory: 359,000 vehicles - Used to show supply normalization in autos. Nike North America inventory growth: Up 65% - Inventory buildup discussed in Nike’s earnings call. Converse revenue: $643 million, up 2% - Nike earnings segment showing the subsidiary remains sizable. Tesla stock move: Down roughly 10% intraday on an ugly day - Used as an example of a stock bucking a strong market tape. Apple downgrade reaction: Down about 6% to 7% intraday - Bank of America downgrade amid weaker iPhone demand concerns. Amazon Lord of the Rings viewing: 1.3 billion minutes - Nielsen streaming rankings. Thursday Night Football viewers on Amazon: More than 11 million per game - Amazon’s NFL streaming performance through three weeks.

Pivotal Quotes: "if you let your brain get stuck in that doom loop, then guess what? Historically, buying stocks when they're down 25%, 30%, 40% leads to good outcomes in the future." — Michael Batnick: Argument for using historical drawdown data to stay invested or buy more during selloffs. "I'm getting to the place where it's like the further this goes down, the more long-term bullish I'm getting." — Ben Carlson: Expressing a contrarian long-term stance amid the market decline. "This is the most extreme market event that I have been involved in." — Simon Bentley: Quoted during the discussion of the UK gilt and pension-fund stress episode.

Implications: The episode urges investors to separate short-term fear from long-term opportunity. For diversified portfolios, higher bond yields, lower equity valuations, and broad selloffs may improve future returns, but recession risk and policy mistakes could still trigger more volatility.