Is the Bull Market Turning to Bear?

bears stalk goldilocks marketStocks tumbled again last week. The last three weeks have seen a major pullback in equities of all types. The DJIA is now in negative territory for the year, the MSCI global index is at 1.14% ytd, small caps, the big winners last year, are now down 8.57%. The S&P 500 index is the one “bright spot” in equities, up 4.78% ytd.

This a big change. For several years, we’ve been in a “Goldilocks” economy, “not too hot, not too cold” which has produced calm, growing equity markets. Now, many investors are wondering if this pullback (a drop of 5% or more) will turn into a correction (10% or more loss) or a crash (20% or more fall) and signal the start of a bear market. Of course, every financial pundit has their own opinion which they are happy to share. Truth is, no one knows the future. We don’t.

However, we do know that there have been 12 pullbacks since March 2009 when this bull market started. The last correction was in 2011. The current bull market is now in its 68th month, which places it about in the middle in length and magnitude of the 17 bull markets since 1871.

We also know that at times like this people often lose track of the long-term. We humans don’t like uncertainty. Studies show we are not generally wired for disciplined investing. Therefore, when people follow their natural instincts, they tend to apply faulty reasoning to investing. These reactions can hurt performance.

We further know that markets have rewarded discipline. $10,000 invested in 1970 in the global equity markets would be worth $430,000 today ($370,000 net of inflation).

So, instead of following one’s emotions at a time like this, we suggest that you focus on what you can control:

  • Creating an investment plan to fit your needs and risk tolerance
  • Structuring a balanced portfolio using equities, fixed income and alternatives
  • Diversifying broadly
  • Reducing expenses and turnover
  • Minimizing taxes
  • Staying invested
  • Rebalancing regularly

A key point in these times is to review your risk profile. There are three components: First, your risk capacity, or financial ability to withstand risk. Second, your risk tolerance, which is your comfort level for risk. And, lastly, your risk perception, or how risky you feel about the current investment environment. For the long-term, you should focus on your risk capacity and risk tolerance and not your current risk perception.

We will be reviewing all of these important points and more at our DWM client seminars on 10/21 in Palatine and 10/28 in Charleston. And, of course, we’re available to our clients 24/7 to help you keep focusing on the key areas needed for long-term investment and financial success.