Now is the time for all Family Offices to come of age. Upon doing so, they will rightfully claim their seats at the U.S. Capital Markets round table, alongside the four additional generational investor groups:
- Sovereign wealth funds
- Swiss banks
- Pension funds
Generational investors, the world’s oldest, largest and most disciplined, comprise the backbone of the U.S. capital markets and asset classes. Generational-investor pioneers laid the foundation for the capital markets because they accounted for the majority of investment capital and trading volume from 1882 to 1920. The investment disciplines they had to develop and hone to be able to survive extreme volatilities within the Consumer Price Index, economy and S&P 500 in the late 19th and early 20th centuries evolved to become the key valuation benchmarks for the S&P 500 and all stocks, i.e.:
- Price-to-Earnings (P/E) multiple
- Dividend Yield
For more about generational investors and the evolution of their disciplines, please see “S&P 500’s Bottoms Occur Only When Generational Investors Buy!”, Michael Markowski, June 4, 2022, AlphaTack.com.
The table below depicts assets for five groups, that in aggregate had assets of $69.1 trillion on 12/31/2021. Assets of the five were equivalent to 129% of the aggregate value of the entire U.S. stock market at 12/31/2021.
The Family Office group, which consists of 7,300 Family Offices, has the second-largest portion, equivalent to 8.5% of the $69.1 trillion of all assets held by generational investors. A high percentage of the assets held by Family Offices have been amassed in the 21st Century. According to Forbes, from 2008 to 2019, the number of Family Offices within the U.S. grew by 10 times. The average assets held by a Family Office in 2019 were $765 million.
However, the average Family Office has is distinctly disadvantaged when compared to a Swiss bank, endowment, public pension fund, or a sovereign wealth fund for three reasons:
- Significantly fewer assets — Average assets managed by a Swiss bank, an endowment, a public pension fund, or a sovereign wealth fund dwarfs a Family Office. Much larger asset bases of the average Swiss bank, endowment, pension fund, and sovereign wealth fund enables them to afford full-time analysts and economists, etc., who monitor economic and secular investment trends to determine the best asset classes, e.g., stocks, cash, bonds, real estate, commodities, and precious metals.
- Less experience at investing for future generations — Endowments, public pension funds, and Swiss banks have centuries-old and time-tested disciplines and policies, which preserve capital and reduce risk.
- Little, if any, secular bear market investing experience — A high percentage of all Family Offices in the U.S. gained their stock market experience from investing during the 2009 to 2022 secular bull market. This has lulled them into the false sense of security that they are stock-market experts. However, this is not the case; such overconfidence can be dangerous! This is clearly an enormous disadvantage void experienced by numerous Family Offices. Picking winning stocks during a secular bull market is as easy as throwing a dart at a stock quotes’ page in a newspaper.
- Time is of the essence for Family Offices to deploy defensive strategies. The troubling findings from my research on inflation from 1871 to 2022; relative to how it affected the S&P 500’s real dividend yields, should startle every Family Office. Based upon this empirical data the forecast follows:
- S&P 500 to decline by 79.95% from its January 4, 2022 all-time high. Please see “Inflation to Shoulder Blame for 79.95% S&P 500 Decline”, Markowski, June 4, 2022, AlphaTack.com.
- U.S. to enter its first Great Depression since 1929−1938. Please see “Federal Reserve’s Repeat of 1920−1931 Policy Mistakes Set Stage for Next U.S. Great Depression”, Markowski, June 4, 2022, AlphaTack.com.
Inflation is the nemesis that will cause both of the above events, which have the potential of being devastating. A decline of such magnitude for the S&P 500 would be the recipe for the U.S. to enter into its Third Great Depression. The chart below depicts the last time the S&P 500 declined by at least 79.95%, while from 1929 to 1932 the S&P 500 declined by 85%. The decline was the primary cause for the Second Great Depression of 1929 to 1938 being much longer than the First U.S. Great Depression of 1920 to 1921.
Finally, based upon my research of secular markets, the S&P 500 and the U.S. economy face another risk. The secular bull market that began in 2009, ended when a new secular bear market began on January 4, 2022. This bear will be the cause of a 47% to 85% decline for the S&P 500. The decline ranges are based on S&P 500’s peak to trough declines for all of its secular bear markets since 1929, as depicted in the table below.
To prepare for extreme U.S. stock market volatility, which is inevitable, do the following:
- Liquidate all blue-chip shares, mutual funds and Exchange Traded Funds
Cash should be invested in any or all of the following:
- U.S. government 2-year treasury notes*
- Long/short index hedge funds**
- Hedge/Venture capital funds**
- Private technology startup and early-stage companies**
- Select microcap companies and penny stocks**
Never more salient and urgent than today, the AlphaTack.com slogan “Growing Assets Against the Wind”…
reflects the wisdom inherent in our philosophy.
The chart below depicts the performance of AlphaTack’s Bull & Bear Tracker, which gained 224% vs. 51% for the S&P 500 from March 2018 to May 2022. The Bull & Bear Tracker is an ideal secular bear market investment vehicle since it fully leverages extreme volatility. The three yellow shaded areas on the chart depict the algorithm’s gains vs. the S&P 500’s declines for the 2018, 2020, and 2022 volatile periods. For more information about BBT go to AlphaTack.com.