The 70% Solution

Cracks in the Wall of Investor Optimism

Bear market rallies will recur.” The 2022 damage to stocks from rising interest rates is mostly behind us. The next leg down in THE MOTHER OF ALL BEAR MARKETS will be driven by falling corporate profits. Those shortfalls will begin to appear in a couple of months. Consumer prices will rise closer to 6% than 2% in 2022…The 2023 recession is virtually assured.” The 70% Solution - Summer 2022

Bear markets end with widespread capitulation while a chorus of the stock trader’s prayer (God, if you get me out of this mess, I swear I will never buy another stock) spreads through out the land. This year’s decline clearly indicates that sellers have been more aggressive than buyers but individual investors continued to buy every dip. Hundreds of millions of dollars have flooded into mutual and exchange traded funds. Despite the selling, individuals remain heavily committed to stocks. The American Association of Individual Investors survey only shows a small increase in cash holdings from 22% to 24%. Individual investors clearly sold shares into the October bear market rally. However, most investors remain hopeful. At bear market bottoms investor cash positions rise above 40%. That is a strong indication that we are far from a bottom. Not a single investor has called me (or any other adviser I know) and said “just get me out”. They mostly ask if this is a good time to buy.


A year ago most investors and economists believed Fed propaganda that the 7% inflation rate was “transitory”. Inflation was widely expected to drop back near 2% this year. Instead, consumer prices rose at a 12% annualized pace in early 2022. Inflation has slowed since June, but prices will once again end the year about 7% higher than a year earlier.

“The rise in consumer prices during the next few months should also be modest. Deep discounting excess inventories of appliances, computers, and XMAS gifts delivered too late for sale last year have begun. The 70% Solution – October 28, 2022