Generational investors are the world’s oldest and largest. They stopped investing in the U.S. stock market in February 2021 when the S&P 500’s real dividend yield (Div/Y) went from positive to negative. Until they begin to buy the S&P 500, which as of May 2022 had declined by as much as 20.9% from its 2022 high, the S&P will continue to set new record lows.
Findings from my research of inflation’s impact on the S&P 500 from 1871 to 2022 enabled the following discoveries:
- A reliable indicator for identifying the S&P 500’s major bottoms was its Div/Y changing from negative to positive after the index had declined sufficiently;
- Utilization of the Div/Y as an indicator enabled generational investors ― the first institutional stock investors ― to be the world’s largest investors for the last three centuries.
Reliability of the Div/Y left no doubt that the indicator evolved from the disciplines that were honed and instilled by the world’s first stock market investors in the late 19th and early 20th centuries.
PLEASE NOTE: For more information on the Div/Y please read Inflation to Shoulder Blame for 79.95% S&P 500 Decline, Michael Markowski, June 4, 2022, AlphaTack. The precise decline forecast to the second decimal point was calculated from the S&P 500’s real dividend yield (Div/Y) of −6.73% for April 2022. Based on the negative real yield, the Div/Y is forecasting the S&P 500 to descend to 965.82 from its all-time high of 4818.62. Because the Div/Y’s forecasts are based on the most recent month’s inflation rate, when the inflation rate for the most recent month is published the S&P 500 forecasted target and percentage decline from its 2022 all-time high, changes.
The table below depicts the five generational investor groups and their $69.1 Trillion in aggregate assets. They have been in existence since the first Swiss bank was established in 1790. On December 21, 2021 the amount was equivalent to 129% of the $53.4 Trillion aggregate value of all U.S. stocks. When generational investors become buyers, a bottom for the S&P 500 is established and the index moves higher.
All generational investors are fiduciaries. They adhere to the same mandate: to preserve capital and increase cash flow to fund constituents, descendants, retirees and safe-haven clients. Generational investors are the world’s most disciplined and longest termed investors.
The groups and their members are the very backbone of the U.S. capital markets and asset classes. To comprehend the significant influence generational investors have, their aggregate assets were double the $34.2 Trillion of net assets held by all U.S. stock, bond, and money market funds at December 31, 2021.
The generational-investor breed is a completely different investor from any other. Because, even the smallest of generational investors ― a family office ― has an average of $765 million in investable assets, they cannot effectively generate a reasonable return from trading the majority of their assets. A generational investor is analogous to an aircraft carrier with little maneuverability, compared to an individual investor PT boat. They also cannot invest a majority of their assets into non-liquid investments.
Because of their sheer size disadvantage, a generational investor’s top priority is to find and make investments that distribute cash. Their ideal asset class to invest in is companies that pay dividends, especially those that regularly increase dividends. Coca-Cola is a prime example: It has paid cash dividends since 1920, and has increased its dividend every year since 1963. (The chart below depicts that Coca-Cola’s dividend payments increased from $0.17 per share to $1.68 per share from 1995 to 2021.)
Generational investors were the only institutional investors until 1924, when the first U.S. mutual fund was established. Because they experienced extreme CPI volatility during extended periods of inflation, followed by periods of extreme deflation from 1871 to 1932, they were forced to become disciplined to preserve their assets. For more on the severe CPI volatility and economic contractions they had to endure, please see “Federal Reserve’s Repeat of 1920−1931 Policy Mistakes Set Stage for Next U.S. Great Depression”, Markowski (June 4, 2022). AlphaTack.
Generational Investor Core Real Dividend Yield Disciplines
The disciplines generational investors developed have remained intact for the last 150-plus years. Below are the core disciplines they had to implement to eliminate and/or reduce risks.
Build cash reserves when S&P 500 dividend yield went from positive to negative by implementing the following:
- Sell non- dividend-paying holdings to build cash reserves
- Accumulate cash received from dividends instead of buying additional shares
- Sell dividend-paying holdings when S&P 500 at or near an all-time high
PLEASE NOTE: With a 100-year or more time horizon, it would be imprudent for any investor to have assets at risk when the S&P 500’s real dividend yield is negative. For this reason generational investors will not be buyers of stocks at any price until the S&P 500’s Div/Y becomes positive. The yield had been positive from March 2020 to January 2021. (The last time the Div/Y had been negative was November 2019 to February 2020.)
PLEASE NOTE: The disciplines practiced by generational investors enabled the body of evidence or historical statistical data for the two key valuation metrics, the Dividend Yield (Div/Y) and the Price to Earnings multiple (PE), to evolve and mature as the primary valuation metrics for a stock or an index.
Findings from my research of the S&P 500’s dividend yields (Div/Y), overwhelmingly support that the index’s Div/Y status changes have been an extremely valuable indicator for when to be in and out of the stock market. The Div/Y, outperforming S&P for three centuries, led to my conducting additional research to reduce asset-class reallocation volatility. Asset-class allocation volatility occurs when changes for the Div/Y, from positive to negative and vice versa, are temporary. Research was conducted on periods of less than 12 months during which the S&P 500 dividend yield was negative. From 1871 to 2022 there were 23 periods that qualified. The goal was to reduce asset-class allocation volatility for those periods within which a yield status change had a high probability of being temporary.
AlphaCenturi Dramatically Reduces Asset-Class Reallocation Volatility
Further historical research of the Div/Y’s temporary changes led to development of AlphaCenturi, a rules-based algorithm that is either short or long the S&P 500 for 365 days a year. Empirical data evidences the AlphaCenturi algorithm has repetitive reliability, which reduces asset-class reallocation volatility. Had AlphaCenturi been available, it would have disregarded the Div/Y’s January 1966 sell-the-S&P-500 status change when the index’s dividend yield went from positive to negative: from January to February 1966 the S&P’s dividend yield had reverted to positive from negative. (By following AlphaCenturi instead of the Div/Y indicator, the loss of 3.6% resulting from the volatility would have been avoided.) Likewise, AlphaCenturi disregarded the Div/Y signal change to negative in May of 2014. (By August of 2014, the yield reverted from negative to positive and a 5.4% loss was avoided.) AlphaCenturi’s signal also went negative from positive in June 2021 when the S&P 500 was at 4302.43; this, after the Div/Y had gone negative in February 2021 when the S&P 500 was at 3950.43. (By the May 20th low for 2022, the S&P 500 had declined by 11.4% from AlphaCenturi’s June 2021 negative signal, and by 3.5% from the Div/Y’s February 2021 negative signal.)
Because the duration of AlphaCenturi’s long/short signal durations have averaged 3.06 years from 1871 to 2022 a comparative analysis was conducted. The mandate was to determine the returns from selling the S&P 500 short versus investing the sale proceeds into short-term savings accounts, interest-bearing notes, etc., at an average 2.4% per annum interest rate. Gains were 101% higher from following the more conservative interest-bearing instruments, instead of a “shorting the S&P 500” strategy. The chart below depicts that $100 invested into AlphaCenturi‘s S&P 500 Long/2.4% strategy in 1871 (hypothetically), increased to $1,079,789.00 in 2021: $100 invested into a buy and hold the S&P 500 strategy, only increased to $96,910.00 for the 147-year period.
Bull & Bear Tracker (BBT) Leverages Stock Market S&P Volatility
AlphaCenturi operates similarly to another of AlphaTack’s index trading algorithms, the Bull & Bear Tracker (BBT), which is also either long or short the S&P 500 for 365 days a year. The BBT was developed in 2018 from my research of all market crashes since 1929. The chart below depicts that the BBT gained 21.58% vs. the S&P’s decline of −13.61% during the first four months of 2022. From 2018 to April 30, 2022, the algorithm gained 224% vs. 51% for the S&P 500. The BBT is an excellent alternative to the 2% per annum interest bearing investments for those periods that AlphaCenturi is short the S&P. (Access to the BBT is exclusively available via AlphaTack.com.)
Bull & Bear Tracker and AlphaCenturi Determine When to Be In-or-Out of the S&P 500
Differences between the two long/short algorithms that monitor the S&P, follow:
- Bull & Bear Tracker predicts short-term direction (average signal duration 4.5 days)
- AlphaCenturi predicts long-term direction (average signal duration 3.06 years)
PLEASE NOTE: With algorithms that deliver a one-two punch, AlphaTack.com is the only provider of a comprehensive strategy to enable a portfolio to increase during cyclical and secular bear markets. AlphaCenturi indicates when an investor must be defensive or offensive over the long haul. The Bull & Bear Tracker enables a portfolio to grow by leveraging the short-term volatility, which occurs regardless of a market’s macro or long-term direction. The Bull & Bear Tracker is a great alternative to the interest bearing securities and savings accounts utilized when AlphaCenturi is short the S&P 500.
PLEASE NOTE: To learn more about AlphaCenturi and the success ratios for its signals please read AlphaCenturi Algorithm Outperforming S&P for Three Centuries ― Short the S&P 500, Markowski (June 4, 2022). AlphaTack. To understand the development-cycle and the efficacy of an algorithm developed from backtests, click here. AlphaCenturi’s signals are exclusively available through AlphaTack.com, a provider of proprietary intelligence to professional and generational investors ― especially to the family offices that preserve and grow a family’s capital for future generations.
Evolution of Core Stock Market Disciplines
The generational investors’ core disciplines began to evolve after the New York Stock Exchange (NYSE) was founded in 1792. What motivated all investors to buy stocks in the late 18th, 19th and early 20th centuries was not trading shares for a profit. There was very little liquidity back then. The primary reason for an investor to remove their money from a bank and to buy shares was the business’ ability to pay cash dividends. Dividend paying stocks became the ideal asset class for Swiss Banks, the first generational investors.
PLEASE NOTE: For those periods within which the dividend yields were at or above the inflation rate, investors held their shares to collect cash dividends. During those periods in the late 19th and early 20th centuries, when the inflation rate was above the dividend yield, investors sold their shares and deposited their money into a bank savings account or invested in bonds. It’s because almost all extended periods of high inflation were followed by extended periods of high deflation.
The table below contains the most volatile CPI periods throughout the history of the United States, from 1882 to 1921. Periods of double-digit inflation were routinely followed by double-digit deflation.
The 1881−1913 and 1871−1913 charts below, which cover most of the chaotic inflation/deflation periods in the above table, also depict the S&P 500’s volatility for the 32-year period.
CPI volatility was the cause of the boom-to-bust economy within the U.S. The CPI volatility resulted in the U.S. being rife with recessions and depressions from 1871 to 1913. The chart below depicts the U.S. recessions (shown in grey) and the S&P 500 from 1871 to 1913.
Because of the extreme economic and market volatility depicted in the above charts, investors did not adopt a “buy-and-hold” mentality until the middle of the 20th Century. Before buying and holding stocks could become fashionable, the late 19th and early 20th century investors had to be baptized by fire. Because of the chaotic CPI from 1882 to 1923, as depicted in the table below, investors quickly learned that they could be whipsawed by investing in gold and real estate at the extreme inflationary peaks, which were routinely followed by recessions and rapid CPI descents to extreme deflation lows (CPI’s inverse peaks) and stock market bottoms. The investors sold their holdings during periods of inflation and bought them back during periods of deflation. The table below contains all of the periods that had a minimum of 12 months of deflation from 1882 to 1923. The S&P 500’s aggregate gain for the deflation periods was 44.5%.
PLEASE NOTE: At the peak of a deflationary period, which always coincides with a bottom for an economy and stock market, the prices of financial assets — including stocks and bonds — increase significantly. The value of real assets — including real estate and gold — decrease during extended periods of deflation.
The S&P 500 performing well during periods of deflation fully supports that all investors were forced to become disciplined ― including generational ― because of extreme market and CPI volatility from 1882 to 1936. Their disciplines of selling when inflation was present, and buying when deflation was present, enabled them to grow and protect their assets by regularly moving in-and-out of the stock market and into cash, savings accounts and short-term interest paying securities.
The probability is very high that generational investors accounted for a majority of the investment capital and share trading volume for the U.S. stock market from 1882 to 1920. The concept of a minority owner of a business receiving a share of the profits, i.e., dividend payments, was considered…
- Morally and politically correct for the time
- A solid argument for Capitalism and against Communism or Marxism
- Enabling for a passive investor to receive steady and dependable income from a diversified pool of investments, without having to own and manage commercial real estate and/or businesses, etc.
The bottom line is, whenever the S&P 500’s dividend yield is negative the generational investor is a net seller of stocks. Instead, the generational investor is disciplined to maintain cash and cash equivalents until a correction takes the S&P 500 to a positive yield valuation. Thus, when the index’s yield is negative there are no floors between the level the S&P 500 is trading at and the level that it must go to for the dividend yield to become positive. Because of this phenomenon, whenever the index has a negative dividend yield it is at extreme risk for a violent correction; and, especially should the negative yield coincide with S&P 500 at or near an all-time high. This was the case that precipitated the following violent corrections:
- September 2008 to
- March 2009
- May to June 2010
- January to April 2018
- October to December 2018
- February to March 2020
The infamous “May 2010 Flash Crash” that occurred on Thursday the 6th, resulted in the Dow Jones losing 9% of its value within minutes. The Dow Jones is primarily comprised of blue-chip dividend-paying companies, including General Electric’s and Proctor & Gamble’s share prices that were afflicted by the Flash Crash. The crash coincided with the December 2009 to May 2010 period within which the S&P 500’s Div/Y was negative. The crash further supports the thesis that the S&P 500 is subject to extreme volatility whenever its Div/Y is negative. When the S&P 500’s dividend yield is positive, the highly disciplined generational investors maintain price limit orders to purchase shares at below the market price. When the dividend yield is negative, they do not enter or maintain below-the-market limit orders at any price other than the much lower price at which the Div/Y becomes positive.
The conclusion drawn from my research of the S&P 500’s negative and positive dividend yields, from 1871 to 2022, overwhelmingly supports that the investor disciplines that now govern a stock market’s lows were developed by generational investors in the late 19th and early 20th centuries. Since generational investors will not be net buyers of stocks until the S&P 500’s dividend goes from negative to positive all investors should prepare for a 79.95% decline for the S&P 500 from its January 2022 all-time high. For more about the rationale in support of the forecasted percentage decline ― based on the most recent rate of inflation ― please read “Inflation to Shoulder Blame for 79.95% S&P 500 Decline”, Markowski, June 4, 2022, AlphaTack. To understand the reasons a decline of such magnitude would cause the next U.S. Great Depression, please read “Federal Reserve’s Repeat of 1920−1931 Policy Mistakes Set Stage for Next U.S. Great Depression”, Markowski (June 4, 2022), AlphaTack.
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