Speak politely to them, but steer clear of permabears when seeking long-term investment advice

Investing can be likened to a roller coaster ride with ups and downs, peaks and valleys. Knowing the potential fluctuations, it's a journey you choose to embark on. The experience varies depending on whether your focus is short-term or long-term.

If your ancestors had invested just $1 in US large company stocks in 1824

In the short term, stock prices fluctuate wildly, but in the long term, they generally trend upwards. For instance, if your ancestors had invested just $1 in US large company stocks in 1824 and reinvested the dividends, by 2023, that $1 would have ballooned to $16 million in 2023.

Source: Sam Ro 

This trajectory is a steep climb upwards. But this might seem counterintuitive, given the perceived risks and volatility of the stock market.

The key lies in the investment duration. Shorter investment periods have a lower chance of yielding positive returns owing to volatility and various risks. However, extending the investment timeline significantly increases the likelihood of a positive outcome.

Positive returns for those invested for 16 years or more

Since 1928, for example, the S&P 500 has consistently delivered positive returns for those invested for 16 years or more (see chart below). It only delivered positive returns a bit higher than 50 %, applying a monthly time frame.

Source: Bespoke

Reflect on the myriad events since 1928 that could have swayed investors – reasons aplenty to sell, yet the stock market has persevered, continuously ascending.

The market has shown remarkable resilience even considering more recent times, like since 2009.

Source: Michael Batnick

Monthly and yearly, investors face numerous reasons to worry and consider selling.

Yet, despite the short-term uncertainties, where no one can predict exact outcomes, the stock market's long-term trend has been predominantly upward.

Source: Compounding Quality

While the short-term is a mystery to all, the long-term trend indicates that stocks generally ascend. And, of course, those who started to invest in 1929, shortly before the dot.com bubble burst or before the GFC and the top in late 2021, had a tough time. Those who invested only once and got the timing wrong were even worse off.

But starting with a considerable investment amount and then practicing compounding (reinvesting returns back into one’s account) and Dollar averaging by investing a fixed additional amount each month did much better.

Why investing in the NASDAQ 100 is an excellent thing to do - at nearly all times

The recent bear buzz has been all about the significant impact of Nasdaq's key players on the market in 2023, but there's been less focus on their minimal contribution over the past two years.

This Sunday will mark two years since the Nasdaq Composite and Nasdaq 100 indexes hit their all-time highs. Despite their substantial gains in recent months, they're still down by 12% and 4% from those peaks.

In the 16 years between July 2007 and September 2023, the Nasdaq 100 index (in EUR) obtained a compound annual growth rate of 16.11%, a standard deviation of 17.83%, and a Sharpe ratio of 0.88. So far in 2023 (YTD), the Nasdaq 100 index has returned 44.77%.

The 2-year perspective

It's unusual for the Nasdaq 100, which represents the most investable segment of the Nasdaq and reflects the influence of mega-cap companies, to go through a two-year dip. This current downturn is only the third in almost 30 years, the others being the aftermath of the unique tech bubble and the global financial crisis.

The chart below, sourced from YChart, illustrates that even at the lowest point of the COVID-19 crash, the NDX was breaking even compared to two years before, especially on March 16, 2020.

Some investor chatter is just bonkers.

The Nasdaq is an “exaggerated” mirror of the overall market, which has also experienced a rare moment of slightly negative performance over two years. Citi's chief investment strategist, Scott Chronert, notes that the S&P 500's rolling two-year return is in the 16th percentile over 30 years. This, he suggests, explains the subdued investor sentiment, even with the S&P's 10% rally in the past three weeks.

In the past two years, there's been a contradiction to the skeptical view that mega-cap stocks are just a monolithic group benefiting from indiscriminate momentum buying.

Despite popular belief, these stocks have not been uniformly affected by rising interest rates. The biggest Nasdaq bubble in history occurred when Treasury yields were near 6%.

Last year's crash was more about valuation compression, a significant downgrade in earnings expectations, and a reversal of extreme investor crowding from 2021.

Not all the Big Seven tech companies have moved in tandem, either. Only Apple, Nvidia, and Microsoft have outperformed the Nasdaq 100 in the past two years, while Meta Platforms has kept pace, and Amazon, Alphabet, and Tesla have fallen behind.

Most of these companies, except for Tesla, down 35% over two years, show little recent upside in profit projections. Nvidia, Alphabet, Microsoft, Apple, Meta, and Amazon are expected to contribute a significant portion of the S&P 500's profit growth next year, though.

The softening of stock prices and firming earnings outlooks have normalized the Nasdaq 100's valuation, bringing its forward price/earnings ratio and premium over the S&P 500 to average levels over five years. This doesn't make them particularly cheap but indicates that excess valuation has been corrected.

Apple remains an outlier, with flat sales and net income for three years, yet its stock is up over 20%, and its forward P/E has increased. This can be attributed to its strong balance sheet in times of higher debt costs and tighter credit. Apple's net income doubling from 2017 to 2021, and maintaining those gains also plays a role.

Apple's share reduction by 1.1 billion shares, or 6.5% of the total, over two years, and Berkshire Hathaway's steady near-6% stake means Apple has effectively repurchased about 7% of its shares.

What drives the performance of these top tech leaders in a winner-take-most economy is complex. They can be aggressive bets on economic optimism or defensive choices amid macroeconomic changes, making it hard for investors to gain an edge.

Where to go from here?

Goldman Sachs' head of hedge-fund coverage, Tony Pasquariello, suggests that factors like buybacks, year-end adjustments, and retail investor trends could support these top names through December. He notes that the current 2% US GDP growth rate seems optimal for these stocks.

However, the recent rally, spurred by a favorable CPI report and a drop in Treasury yields, has seen broader market participation, including small-caps and median large-cap stocks.

The market has responded well to oversold conditions after a 10% correction over three months. Technical progress, reduced volatility, stable corporate credit, an end to Fed rate hikes, and balanced investor sentiment and positioning are positive signs.

So far, the market has held up well, even if the past two years haven't shown significant overall progress.

And 2024?

While I am bullish for the US stock markets until year-end or mid-January 2024, I am more skeptical for the first half of 2024. As Dan Niles from Satori has put it, The market will soon face the three 2024 bears:

1) tapped out consumer

2) higher for longer FED/10-year Treasury

3) higher oil prices in 2024.

While unsure about Dan’s oil bear, I agree with the other two bears. Also, earnings growth may be much lower than projected in certain parts of the US economy.

As a result, we may see a considerable sideways movement in the NASDAQ and declining prices in the R2K, the R3K, and the SP 500.

The current rally may offer a unique opportunity to lighten up on underperforming stocks and keep some dry powder to buy winning hypergrowth stocks during the correction I anticipate in the first months of next year.