IC Study Terms

1946-1949 Bear Market

- Government spending fell sharply (from $84 billion in 1945 to under $30 billion in 1946) as the US rapidly transitioned from a war-time to a peace-time economy. This is often referred to as "inventory recession" as inventories of war time goods reduced demand. - Inflation spiked from 1.7% in February 1946 to 19.7% by March 1947 as WW II price controls were removed. This fueled a recession from February 1945-October 1945. GDP fell over 11%. During this time, military spending peaked at 42% of GDP in 1945, but was just 7% of GDP by 1948. - Stocks topped out in May 1946, then fell nearly 30% through June 1949, one of the longest bear markets in modern history. Corporate earnings grew strongly over this period, with real growth estimated at 120%. One reason stocks performed so poorly was because many Americans avoided stocks given how terrible market returns were throughout the Great Depression.

What is a Benchmark?

A benchmark is a well-constructed index - such as the MSCI World Index - that serves as your portfolio road map and measuring stick. It is necessary to measure relative risk and return and should be consistent with your assets' time horizon and your required rate of return. A benchmark provides a framework to construct a portfolio, manage risk, and monitor performance.

Client Account Restriction Request Form (CARRF)

Allows FI to place restrictions on specific client-requested mandates in an account.

Partial Funding Letter (PFL)

Allows FI to start building out the recommended portfolio as funding arrives and as we wait for any outstanding transfers to complete.

No Cost Basis LOI (NCBL)

Allows FI to start building out the recommended portfolio in anticipation of cost basis coming over with the transfer.

1957-1961 BULL Market

As a result of the 1957-1958 recession, the Fed slashed rates and the economy resumed growing. Demand for stocks rose as the stigma of investing in stocks, stemming from the Great Depression, had largely evaporated by now.

2% Rule

Bear markets typically decline by about 2% per month, on balance, throughout the overall decline. Sometime they fall by more, sometimes less. If the market falls by much more than 2%/month, this might be a sign it's not a bear but instead a correction, where the drop tends to be sharp and steep from the peak. In this case, it's probably not a good idea to plan to go defensive when the market rallies because it might be the resumption of the bull.

1987 BEAR Market

Black Monday Stocks fell 34% from August-December 1987. About 21% of this decline occurred on October 19, a day known as "Black Monday." There was no economic recession, although, leading up to the decline; investor sentiment had become euphoric and the Fed withdrew liquidity from the US banking system. Short-term rates were driven up in an attempt to protect the US dollar from weakening. The yield curve inverted in late 1986. Rates were rising all around the world (a sign of too-little liquidity not being priced into stocks).

2000-2002 Bear Market

Conditions: Stocks zoomed higher in Q1 2000, though the market's underlying fundamentals were materially deteriorating. The Fed had been hiking short-term interest rates to combat rising inflation, inverting the yield curve. The tech IPO boom had inflated the overall supply of stocks, especially those of companies with questionable business models and a lack of real earnings. All of which led to investor euphoria and the following conditions. 1. Popular commentary about a "new economy" driven by technology. 2. Stock market valuations rising to stratospheric levels. 3. The tech bubble period had a surge in IPOs, particularly low-quality ones. 4. Oil prices rose 134% YOY by February 2000. Stocks peaked in March 2000 and began falling. While there were counter-trend rallies throughout the bear, stocks ultimately bottomed in October 2002. The S&P 500 fell 49% over 30 months, the longest bear market since the 1940s. There was an extremely mild recession during this bear; GDP contracted just 0.3% from March-November 2001. 2002: A Year of Political Risk In response to corporate accounting scandals in the early 2000s (Enron, Tyco International, WorldCom, etc.), Congress passed the Sarbanes-Oxley Act (SarbOx), which attempted to prevent future corporate accounting malfeasance. At the time, a Republican occupied the White House and Republicans controlled the House, while Democrats narrowly controlled the Senate. This was not a case of a single party majority presenting political risk. There was near unanimous support for SarbOx in both chambers of Congress (423-3 in the House and 99-0 in the Senate) and President Bush ultimately supported the more stringent Senate version of the bill. Regardless of whether or not SarbOx would ultimately achieve its objectives of eliminating corporate accounting fraud, it was fraught with potential negative consequences, including increased compliance costs and increased CEO compensation to account for the heightened risk that executives could be held personally responsible for accounting irregularities. As a result, markets reacted negatively. The S&P 500 fell sharply from March 2002 (when reform discussions began in the wake of Enron's failure) through late July (when SarbOx was signed into law). Arguably, the bear was modestly extended by the passage of SarbOx. While it's very difficult to assign causes for any market move with any degree of certainty, it's reasonable to conclude markets feared the uncertainty that SarbOx created. Keep in mind that the economy grew throughout all of 2002, while markets were down a lot.

1933 Banking Act (June)

Established the Federal Deposit Insurance Corporation (FDIC) and imposed other banking reforms

1973- 1974 Bear Market

Factors that contributed to the S&P 500's 48% decline: - Popping of a market bubble US ended Bretton Woods and Gold Standard in 1971, weakening the dollar and raising inflation. - Egypt and Syria attacked Israel in October 1973. US support of Israel led to an oil embargo. Oil prices skyrocketed. - Price controls were removed following Nixon's re-election in 1972. This led to a rapid rise in pent-up inflation. - US short-term rates went from 4.0% to 11.0% in roughly 2 years (February 1972-April 1974), causing the yield curve to invert as inflation spiked. The US economy fell into recession in November 1973. Despite the recession, the Fed kept raising short-term rates through April 1974 to combat continued high inflation. The Watergate scandal was highly visible in the news throughout 1973 and President Nixon resigned from office in August 1974. Beginning in late 1974, the Fed began aggressively loosening monetary conditions. Although stocks bottomed in October 1974, the recession lasted until March 1975.

1982-1987 Bull Market

Falling Fed Funds Rate: The Fed funds rate began rapidly falling in the second half of 1981 as inflation rates fell sharply. The bull began amid very depressed investor sentiment, as evidenced by single digit P/E ratios for stocks throughout most of 1982. This period was characterized by lower tax rates, deregulation, increased federal gov't spending and the rise of junk bonds, private equity and leveraged buyouts. Sentiment was high following a 165% return in global stocks throughout the beginning of 1985. Oil prices had also surged 114% YOY by July 1987.

2020 Bear Market

Global Pandemic In response to the COVID-19 viral epidemic, government-mandated social distancing measures throughout the US and other parts of the world greatly hindered economic activity. Markets fell >30% in a short period ending the 11 year bull market.

1970-1973 Bull Market

Growth during this time was driven largely by the "Nifty Fifty," a group of fast-growing, large cap US companies that were considered "one decision" stocks. These companies represented a renewed optimism in US economic strength after the Great Depression dampened this type of spirit for many years. Many believed these 50 companies were the only stocks you needed to own. Valuations were driven very high by the end of the bull, with the average P/E for these stocks reaching 42 by the year 1972. Inflation rose to high levels by the early 1970s. The Fed responded by aggressively tightening monetary policy. The Fed funds rate increased 21 times in 1973 alone! On August 15, 1971, Nixon enacted a 90-day price and wage freeze with subsequent increases requiring approval.

Bear Market 1937-1942

In 1939, Nazi Germany began invading its neighbors. When Germany invaded France in May 1940, US stocks fell steeply. Widespread tax increases were instituted to help fund the war effort, with top corporate rates increasing from 24% to 31% in 1941. Following the attack on Pearl Harbor in December of that year, more tax increases followed in 1942, with the top rate rising to 40%. Stocks ended up falling 60% through April 1942. By this point, the US was fighting a two-front war in Europe and the Pacific.

Recession of 1937-1938

In an effort to combat inflation, the Fed doubled bank reserve requirements. The FDR administration sterilized gold inflows, which froze the monetary base and reduced the money supply. The economy fell into a recession in mid-1937.

1974-1980 Bull Market

In the wake of the Watergate scandal, voters were weary of the Republican Party. When Jimmy Carter was elected president in 1976, Democrats held a big majority in the House and Senate. In an attempt to combat the energy crisis, Washington passed sweeping legislation, which created uncertainty. Notable actions included: Emergency Natural Gas Act of 1977, which authorized the federal government to take emergency actions to address the natural gas shortage Reorganization Act of 1977, which allowed the executive branch to submit plans to Congress to reorganize government agencies Creation of the Federal Department of Energy in August 1977 National Energy Act of 1978, which, among other things, regulated public utilities, instituted a "gas guzzler" tax for low gas mileage vehicles and instituted energy price controls The S&P 500 fell 7% in 1977, even as the economy expanded by about 5%. The stock index then rose just 6.5% the following year. While the US was experiencing rising inflation and a recent oil shock, the flat market over this period may have been (at least partially) due to the uncertainty surrounding an active legislative agenda in Washington, which rattled investors. Stocks experienced strong double-digit returns in 1979 and 1980 amid continued rising inflation. Corporate earnings growth wasn't particularly strong; rather, it was inflation that largely drove stock prices higher and also caused the US dollar to plummet.

Emergency Banking Act of 1933 (March)

Intended to rebuild consumer confidence in US banks Authorized the Fed to issue emergency currency People redeposited previously hoarded money back into neighborhood banks.

Who are the members of the IPC?

Ken Fisher, Jeff Silk, Bill Glaser, Aaron Anderson, and Michael Hanson

1962-1966 BULL Market

President Kennedy abandoned his anti-business rhetoric and supported supply-side measures such as tax cuts. Markets began rising again. Following Kennedy's assassination in 1963, the proposed tax cuts became law with the signing of the Revenue Act of 1964. Not just a reduction in marginal income tax rates, but also added investment tax credits, improved depreciation allowances, lower capital gains tax rates and a reduced corporate tax rate from 52% to 48%. Many economists believe this tax reform helped drive healthy economic growth, on balance, throughout the rest of the decade.

Typical Characteristics of a Correction

Short, sharp, steep drop Over-hyped scare stories -10% to -20% decline Recovers quickly?

Typical Characteristics of a Bear

Slow, rolling top Multi-trillion $ wallop Euphoria Over supply of equities

Supply Chain Talking Points

Some headwinds still persist: - Airlines stopped recruiting and training pilots in the aftermath of lockdowns, contributing to high airfares. - Component shortages (especially semi-conductors) have raised prices for new and used cars. - Delays at ports and a lack of shipping containers drove inefficiencies in shipping Signs that pressures are easing: - New York Fed's Global Supply Chain Pressure index, while still elevated, appears to be subsiding. - China and other economies around the world are re-opening from lockdowns - PMI Work Backlogs for developed nations are falling - "Inflation is too much money chasing too few goods and services. It appears that the "too few goods" problem should ease soon.

2003-2007 Bull Market

Stocks began charging higher in 2003 as the Iraq War began. An example of regional wars not being a problem for global stocks. Monetary policy remained accommodative throughout most of the bull market. Booms in the natural resource and real estate spaces helped fuel the expansion. Non-US stocks, including Emerging Markets, outpaced US stocks throughout the bull.

1966 BEAR Market

Stocks fell 22% over eight months. This was the second straight bear market not accompanied by an economic recession. Amid rising fiscal spending on the Vietnam War, the Fed started restricting money supply and credit growth to combat inflation. They restricted banks' ability to raise funds through CDs, limited banks' access to the discount window and raised reserve requirements creating a credit crunch. The yield curve flattened and liquidity disappeared.

1968-1970 BEAR Market

Stocks fell 36% over 18 months. After a decade of uninterrupted economic growth and rapidly rising government spending, inflation was materially rising. The Fed tightened monetary conditions, the yield curve inverted and a recession ensued.

1956-1957 Bear Market

Stocks fell well in advance of the economy Egypt nationalized the Suez Canal in July 1956 leading to Israel, UK, and France invading the canal known as the Suez Crisis. The Suez Canal closed October 1956 to March 1957 and Syria shut down Iraq's pipelines. At that time 2/3rd's of Europe's oil passed through the canal. The UK experienced severe oil shortage and collapse of its banking system. Tightening monetary policy flattened US yield curve to zero spread. Recession occurred from August 1957-April 1958. The Fed, however, had already been tightening monetary policy (raising short-term interest rates to fight rising inflation) by the time stocks peaked in 1956. These actions caused the US yield curve to flatten, which, in this case, was an accurate warning sign the economy was moving into a recession.

1946-1956 Bull Market

Stocks rose 267% During this time there were major advancements in technology including the beginning of the transistor age and the innovation of chemicals and materials. The US emerged from the war an industrial powerhouse, as much of Europe's industrial base was destroyed by heavy bombing during WWII, while factories in the US remained intact. During this time we saw a proliferation of credit and the emergence of bank-issued credit cards. Consumers now had access to credit they previously didn't, which meant businesses began generating revenue they might not have otherwise received, thus helping stimulate the economy. Neither the Korean War (1950-1953) nor an economic recession (July 1953-May 1954) derailed this bull market.

18 Month Rule

The 18-Month Rule advocates not remaining defensive longer than 18 months to ensure you participate in the initial upward thrust of the next bull market. The average bear market since the Great Depression has lasted about 16 months and only a few have lasted two years or longer. The longer a bear market lasts while you're defensive, the more likely you're waiting too long to get back in. If you remain bearish longer than 18 months, you may miss out on the rocket-like ride that is almost always the beginning of the next bull run. Missing that can be very costly.

What were the tariffs imposed in 1930?

The Dust Bowl drought caused many farmers to default on bank loans, which caused banks to fail. This led to deflation and, eventually, a recession. In an attempt to protect domestic farming, the US government passed the Tariff Act of 1930 (Smoot-Hawley), which raised US tariffs to the highest in 100 years and targeted foreign agricultural and other imports. Foreign countries retaliated with tariffs on US imports and global trade fell by over 50%.

Who is the IPC supported by?

The IPC is supported by a large Research Department composed of investments professionals dedicated to assiting them with every step of the investment process - including analyzing macroeconomic trends, monitoring each investment sector and major country around the world, and evaluating individual securities.

2/3 - 1/3 Rule

The Two-Thirds/One-Third Rule references that about one-third of a bear market's decline occurs in the first two-thirds of the bear's duration, and about two-thirds of the decline occurs in the final one-third of its duration. This is further evidence that you don't need to get out of the market in the early stages of a bear to avoid a significant portion of the overall decline. Even if you don't take defensive action until a little more than half way through a bear, you can still sidestep more than half of its drop.

1942-1946 Bull Market

The US bombed Tokyo and other targets on the Japanese mainland as retaliation for the attack on Pearl Harbor. The Doolittle raid caused negligible damage to Japan, however it boosted American morale by showing Japan was vulnerable. By this point the Fed had reduced short-term interest rates to nearly zero. Investors realized the Allied forces would eventually win the war, a full three years before it ended. Stocks took off, averaging 26% per year from April 1942-May 1946.

2007-2009 Bear Market & 2008 Financial Crisis

The bull market peaked in October 2007. Stocks began falling over fears of a bank-induced financial crisis. The thought was that banks had issued too many sub-prime mortgage loans to borrowers who could not afford to make the payments. While a financial crisis ultimately did develop, its causes weren't as simple as the narrative many suggested. An accounting rule called FAS 157 became effective in November 2007 and forced banks to value illiquid assets at the price they would be sold if they had to be sold immediately. This caused banks' regulatory capital to appear lower than normal as firms applied the strictest view of the rules (a decision that was partially due to the effects of the Sarbanes-Oxley regulation). When some sub-prime mortgages were liquidated at fire sale prices in 2007, the reference point was set lower for all mortgages held on bank balance sheets. This started a negative feedback loop that ultimately destroyed nearly $2 trillion in bank capital, causing many banks to become insolvent. Regulators treated firms with low capital levels inconsistently, culminating in Lehman Brothers' bankruptcy in September 2008. One by one, the US government backstopped every financial firm that was otherwise headed for collapse. However, when the government allowed Lehman to fail, banks' willingness to assume counter-party risk for intra-bank lending was severely reduced. Credit conditions severely deteriorated, resulting in a deep economic recession. Stocks fell sharply—the S&P 500 dropped 57% from October 2007-March 2009. By March 2009, the stage was being set for an economic recovery and a new bull market. Guidelines for applying FAS 157 changed in early 2009. Financial firms no longer had to reference actual distressed sales when valuing their most illiquid assets. The Fed instituted quantitative easing (QE) in November 2008. By March 2009, the central bank held $1.75 trillion of debt on its balance sheet. This helped restore confidence in the banking system. Once credit conditions stabilized, pent-up demand fueled a surge in business investment that helped drive renewed economic growth.

2009-2020 Bull Market

The economy began growing again in June 2009, while stocks started rising in March that same year. This growth continued through March 2020, making this time period one of the longest economic expansions and bull markets in history. 1 - One reason for this is that the Fed and other central banks chose to implement QE for years after the financial crisis. This policy led to dampened economic growth and low inflation, elongating the economic expansion by delaying the need for tighter monetary policy. 2 - Investors remained wary for years after the bear market and financial crisis. This helped keep investors from becoming euphoric and has allowed the bull market to persist until 2020. 3 - In 2017, investors had a sentiment transition and were more optimistic than they used to be. Large Market Corrections Throughout the 11-year bull market, several events caused investors to fear its end, resulting in large market corrections: 1 - 2011: A Eurozone debt crisis sparked fears the European Monetary Union would collapse. This, coupled with slowing growth and Standard & Poors' downgrade of US gov't debt, caused a 20%+ correction in global stocks. 2 - 2015/2016: Sharply falling oil prices, slowing Chinese growth and weak manufacturing activity stoked fears of a looming economic recession. Stocks fell > 15%. 3 - 2018: Expected aggressive Fed rate hikes caused investors to fear a recession ahead, causing stocks to fall. Also, evidence suggests massive hedge fund liquidations exacerbated the decline. Stocks fell ~20% in Q4.

3-Month Rule

The first rule is the Three-Month Rule. This rule advocates waiting three months after you suspect a bull market peak has happened before calling a bear. This reduces the chances you get faked, thinking it's a new bear market, only to find the bull market resuming after you've gone defensive. The three month waiting period allows you to assess fundamental data, economic conditions and bear drivers such as investor sentiment and political risk. If this analysis reinforces your initial thoughts that we're in a bear, then you may want to go defensive. If it doesn't, then the three month window helped you avoid going defensive incorrectly.

1990-2000 Bull Market

The greatest bull market in history coincided with the longest economic expansion. US GDP growth averaged 2.4% per year from 1990-1995 but sped to 4.3% per year from 1996-2000. The period was characterized by:Falling inflationImproved productivity from technological advancement, especially in information technology.Semiconductor and data storage prices fell sharply, helping fuel the tech boom.The emergence of the Internet sparked a boom in personal computer sales and helped increase consumer demand for telecommunication equipment and services. Stocks fell about 20% in 1998 over a three month period. This was a classic—though deep—correction that triggered a financial panic around the world. Fear was fueled by both the collapse of the Long Term Capital Management hedge fund and the Russian Ruble Crisis (Russia defaulted on its debt). Japan recapitalized its banking system following the bankruptcy of a brokerage firm in November 1997. However, these fears were overblown. No financial crisis developed and the economic expansion remained intact. US budget surplus started in Q3 1998 and stocks rebounded sharply in Q4 1998, ending the year up over 20%. Y2K proved to be a non-issue In 1999, stocks drifted a bit lower mid-year over fears of possible economic calamity caused by Y2K (the idea that computers would not recognize the year 2000 because they were programmed to start each year with "19").This turned out to be a false fear. Stocks rocketed higher in Q4 1999 as markets realized Y2K was a non-issue.

1990 Bear Market

This decade began with a mild bear market amid an economic recession. In an effort to combat rising inflation, the Fed raised rates from 6.5% in early 1988 to 9.75% by late 1989, inverting the yield curve. Savings & Loans were hurt when deposit rates increased. The Savings & Loan industry deregulated in March 1980, allowing other types of riskier lending. Risky lending and extremely weak balance sheets were then susceptible to weak economic activity, such as the oil price drop of the mid-1980's, causing Savings & Loan failures to peak in 1988. This helped cause a recession that lasted from July 1990-March 1991. Stocks fell 20% from July-October 1990. The unemployment rate kept rising until June 1992, over a year after the recession ended. As a result, the economic recovery was labeled a "jobless recovery."

1961-1962 BEAR Market

This downturn lasted six months—stocks fell 28% and there was no economic recession. Although short-term rates rose, the yield curve did not invert. Arguably, what largely drove the decline was President John F. Kennedy's verbal spat with US Steel over its price hikes. Also, Attorney General Robert Kennedy launched an antitrust investigation, summoned a grand jury and sent FBI agents to the homes and offices of US Steel executives. This caused investors to fear an anti-business agenda in Washington. Additionally, the Cuban Missile Crisis occurred in October 1962, but did not cause stocks to fall further.

1966-1968 BULL Market

This is the mildest bull market in modern history—the S&P 500 rose just 48%. It was largely an extension of prior bull markets going back to the late 1950s, the last time there was an economic recession. Corporate profits weren't all that strong—the bull was almost entirely attributed to expanding valuations as investors became more optimistic over this period.

Value Stocks vs. Growth Stocks

Value Stocks: - Lower Valuations - More likely to pay dividends to shareholders - Revenue/Profits influence by broad economic growth - Economically sensitive companies such as JPMorgan, 3M, Exxon, BHP, etc. Growth Stocks: - Higher Valuations - Reinvest profits back into the company vs. paying dividends - Growing faster than the overall economy - Innovative companies such as Amazon, Salesforce, Netflix, etc.

How can you guys perfectly time getting out of bear markets?

We don't attempt to exit the market at the absolute bull market peak and we don't aim to re-enter only at the ultimate bottom. Trying to perfectly time the top and bottom vastly increases the risk you make a mistake that costs you dearly. Instead, we aim to sidestep a meaningful portion of the bear market decline, which is what we did during the 2000-2002 bear.

1980-1982 Bear Market

Yield Curve Inversion: In an effort to finally whip inflation, the Fed aggressively raised the Fed funds rate beginning in summer 1980. From September-December 1980, short-term rates were increased from 11.0% to 17.5% and the market entered into a bear. Rapid monetary tightening under Fed Chairman Paul Volcker led to a yield curve inversion. Oil supply further declined after the start of the Iran-Iraq War in September 1980. Lending and a Double Dip Recession: The savings and loan industry de-regulated in March 1980, allowing other types of riskier lending. A surge in margin lending going into the peak also contributed to the decline. This beat back inflation but also induced an economic recession. Stocks fell 27% from November 1980-August 1982 as the US economy experienced a so-called "double-dip" recession.