Bull Market Runs Come in All Lengths

 

Bull_Market_Chart.png

Let me help you with the details of the above chart- though it is difficult to read, it’s quite important.   This graph from First Trust reflects the historical performance of the S&P 500 index from 1926 through June 2018. The blue represents bull markets; the red bear markets. It’s obvious that there is a lot more blue on this chart than red. That’s why we encourage you to “stay invested” through the ups and downs of the markets in a risk appropriate, diversified portfolio.

There are 8 bear markets shown. These represent periods of time when markets went down 20% or more. The longest and largest, from 1929-1932, was caused by the Great Depression. This bear market lasted 2.8 years and represented a cumulative decline of 83.4% overall; 47% per year. Ouch. Other bear markets have been much tamer. The average bear market period for the eight periods shown above lasted 1.4 years with an average cumulative loss of 41%. The bear market in 2008-2009 caused by the financial crisis lasted 1.3 years, with a 51% cumulative decline, 41% per year.

There are 9 bull markets shown. The longest and largest occurred after World War II from 1948 to 1963. This bull market lasted 15.1 years and represented a cumulative total return of 936%, or 17% per year. The average bull market has lasted 9.1 years with a cumulative total return of 476%; 21% per year. Some bull markets have been as short as 2.5 years and there have been other longer bull markets of 12.8, 12.9 and 13.9 years.  Our current bull market started in Spring 2009 and has lasted 9.3 years, with a cumulative total return of 350%; 17.5% per year.

At DWM, we are asked the question: “How long can this bull market continue?” This question seems to be based on a concern that a bull market comes with a pre-ordained expiration date; when it runs out of whatever made it go. However, selling equities because a bull market run is longer than average has been a great way to miss out on lots of gains. Remember, bull market runs come in all lengths.

While a bull market may be technically defined as a period of time after a 20% drop (bear market) has reached its end, it’s probably healthier to view a bull market from an economic perspective. Barry Ritholtz in a Friday Bloomberg article defined a bull market as follows: “An extended period of time, typically lasting 10-20 years, driven by broad economic shifts that create an environment conducive to increasing corporate revenue and earnings. Its most dominant feature is the increasing willingness of investors to pay more and more for a dollar of earnings.” This is exactly what we have seen in periods after WWII, the 1980 and 1990s biotech boom and now the maturation of internet, software and mobile companies.

Bear markets are typically brought about by recessions; often when the markets have gotten overheated (such as the dot.com bubble bust in 2000). Bear markets can also be brought on by a financial crisis, as we had in 2008-2009. Recoveries from financial crises are quite different from recoveries from depressions.   A post crisis recovery is marked by slow and erratic economic growth, weak wage gains and disappointing retail sales. Furthermore, investors, after being burned, remain skittish for years. The 2008-2009 crisis scarred consumers and left them more determined to sock away funds.

Case in point, the Wall Street Journal reported Monday morning that the personal savings rate is up to 7.2% from the 3.3% estimated previously. The new number exceeds the 6.4% average savings rate since 1990 and is almost three time the savings rate in 2005. The “wealth effect” that we saw in the mid 2000s that increased spending and dropped savings rates, is not happening now. This news, along with the reduction in corporate taxes, historically low unemployment and continued increased corporate earnings bodes well for a continuation of the current Bull Market despite ongoing negative factors.

Yes, we don’t know how long this bull market will run. And, we’re not going to try to time it. We do know, at some point, this bull market run will come to its natural end. Before it does, we may see more pullbacks (declines of 5% or more) or corrections (declines of 10% or more).   Remember this graph- lots more blue than red- and stay invested.

COMPLACENCY CHECK: MARKETS FINALLY GO DOWN & THE RETURN OF LONG OVERDUE VOLATILITY

 

The last week hasn’t been kind to investors. The S&P500 and Dow officially entered “correction” territory, which signifies a decline of at least 10% from a recent high, after all-time record highs only a couple weeks ago.   What’s going on???

 

The culprit: things were too good!  Recent stronger than expected reports on wages and jobs means growth may be “overheating” and that can lead to inflation and rising interest rates. Rising rates equal higher bond yields, which can make bonds more attractive than stocks, and – VOILA! – now traders don’t want to own stocks, many of which have become quite expensive on a valuation perspective from the nine-year Bull run. Then, in this worst-case scenario, stocks go down and that causes consumer confidence to wane which means Joe Investor won’t want to be another 4G TV. Consumer spending slows, corporate earnings suffer, and recession takes place.

 

Vicious circle, huh? It doesn’t have to be exactly like that. Furthermore, cycles can take a long time to play out – years, not days. In this fast-paced, information at your fingertips society we’re in, we forget that.

Last Friday’s jobs report showed the largest annual increase in wages since 2009. In hindsight, this wasn’t surprising given that 18 states pushed up minimum wages to start 2018. Furthermore, many major corporations, raking it in from the recent tax cuts, have provided one-time Tax Reform-related bonuses to workers. So these government reports, that some traders obsess over, may have been amplified for January and most likely will come down to earth in the ensuing months.

 

It was just a couple of years ago when many were concerned about DEFLATION and hoped of the day when the Fed could raise rates back to “normalcy”. This schizophrenic market is now focused on the fear of INFLATION. The threat of inflation and higher bond yields – evidenced by the Ten-Year Bond reaching four-year highs yesterday at 2.85% – has some worried. But frankly, a 3% or even 4% Ten-Year Bond environment shouldn’t be so concerning. For the last several decades, the 10-Year was higher than that and could be nice “fresh powder” for a Fed when recessionary times come.

 

The “buy the dip” mentality that has been so common place the last few years has not shown up this time around, or at least not until today. Some contend that “buy the dip” investors didn’t have enough time as the quants and hedge funds with big volatility-related bets work through the crash in that subsector.

After a very calm 2017 where we didn’t see any stock markets daily moves of over 2%, we’ve already had a few this year. Volatility is back to “normal” – not 2017 normal, but normal when we are comparing to the last 100 years or so. It was only February of 2016 when we had our last correction, which really isn’t that long ago. But complacency is unfortunately an easy characteristic to exhibit after such a long period of subdued volatility. Hopefully it didn’t lead to overconfidence.

So we’re in a correction…what do we do now?

 

There have been over a dozen market pullbacks of 5% or more since March 2009. This is another one! According to Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer within a January 29 report, “The average bull market ‘correction’ is 13% over four months and takes four months to recover.” Which tells you that generally when the market comes back, it does so relatively quickly, as we’ve already seen today.

 

So, it’s a fool’s game to try to time the market and jump in and out of it. No one has a crystal ball. Furthermore, we know that over time that staying invested is your friend. Studies show that just missing a few days of strong returns (which we could very well get next week or later this month), can drastically impact overall performance.

So avoid any emotional mistakes by staying invested and staying disciplined. Don’t be making any short-term knee-jerk reactions; instead think long-term and focus on the things that can be controlled:

 

§  Create an investment plan to fit your needs and risk tolerance

§  Identify an appropriate asset allocation target mix

§  Structure a well-balanced, diversified portfolio

§  Reduce expenses through low turnover and via passive investments where available

§  Minimize taxes by using asset location, tax loss harvesting, etc.

§  Rebalance on a regular basis, taking advantage of market over-reactions by buying at low points of the market cycle and selling at high points

§  Stay Invested

 

In closing, a pullback / correction like this one is needed to allow the market to recalibrate. It can be a very healthy event because it may signify that the underlying assets’ valuations are getting back in line with fundamentals. So don’t get anxious over this return of long overdue market volatility. We should all get used to this “new normal” and not let our emotions cause us to take irrational actions that could lower our long-term chances of financial success.

 

Don’t hesitate to contact us to further discuss your portfolios and your overall wealth management.

 

[1] Cheng, Evelyn. “The stock market is officially in a correction… here’s what usually happens next.” CNBC, 8 February 2018, https://www.cnbc.com/2018/02/08/the-stock-market-is-officially-in-a-correction–heres-what-usually-happens-next.html. Accessed 12 February 2018.

REMINDER: Markets Don’t Go Straight Up!

Most equity markets were down 3% today, and most equity are markets down 5% this week! It’s the worst week for the Dow since 2011! The Dow is now in correction territory. What’s going on???

It’s been an unusual year. January and February were quite good. But not much has happened since then until this week’s market sell-off.

China’s apparent slow-down seems to be the main catalyst to what triggered this week’s ugliness, but we continue to have the uncertainty as to when the Fed will raise rates, if/when Greece will leave the Euro, and mixed second quarter earnings reports and economic news.

It is times like these that investors need to remember that markets don’t just go straight up. Markets don’t work that way- they go up and down! Not every calendar year can be an “up” year. As a long-term investor, you not only stay invested, but even may see this as an opportunity to buy more.

There have been over a dozen market pullbacks of 5% or more since March 2009. This is another one! Generally, when the market comes back, it does so quickly. So, it’s a fool’s game to try to time the market and jump in and out of it. No one has a crystal ball. Furthermore, we know that over time that staying invested is your friend. Studies show that just missing a few days of strong returns (which we could very well get next week or later this month), can drastically impact overall performance.

The market constantly over-reacts and then reverts back to the mean. Do not get caught up in emotion and sell and buy at the worst times. Unfortunately, humans are not wired for disciplined investing and usually trade poorly based on fear. They wind up selling at the lower prices (on fear) and buying at the higher prices (on elation) per the graph below.

Emotions

I’m sure many readers are nervous after this latest week with all this uncertainty in the air. However, if you use a wealth manager, like DWM, we can help you focus on what can be controlled:

  • Create an investment plan to fit your needs and risk tolerance
  • Identify an appropriate asset allocation target mix
  • Structure a well-balanced, diversified portfolio
  • Reduce expenses through low turnover and via passive investments where available
  • Minimize taxes by using asset location, tax loss harvesting, etc.
  • Rebalance on a regular basis, taking advantage of market over-reactions by buying at low points of the market cycle and selling at high points
  • Stay Invested

In closing, a pullback / correction like this one might actually be a very healthy thing because it may signify that the underlying assets’ valuation is getting back in line with fundamentals. So don’t get anxious over this latest short-term market volatility. By all means, there is a lot of “noise” this month. We’ve seen “noise” before and we’ll see “noise” again. Instead, remember that, over the long-term, the markets have rewarded discipline, through world events of all types. Check out the graph below, put your mind at ease, and have a great weekend. Let us deal with the “noise” and give us a call if you’re still feeling anxious next week.

Markets Have Rewarded Discipline

DWM Fall 2014 Seminar Recap

BMD seminarWe just wrapped up our fall seminars which focused on Pullbacks, Corrections, Bear, and Bull markets. Both venues – Palmetto Brewery in Charleston and Emmett’s Brewery in Palatine – served as great places to not only deliver an important financial presentation, but also as fine places to just hang out and visit with one another.

In case you missed our October seminars entitled “Is it Time for a Pullback, Correction, or a Bear Market?”, here is a quick recap:

  • Pullbacks, Corrections, and Bear Markets all signify a move down of 5, 10, or 20%, respectively, from a recent peak. They may sound scary but a Pullback/Correction might actually be a very healthy thing because it may signify that the underlying asset’s valuation is getting back in line with fundamentals. In other words, Pullbacks and Corrections are different from Bear markets in that they may be simply a “pause” that refreshes an otherwise healthy Bull!
  • Diversification plays a huge role to a balanced portfolio. The end of September and beginning of October saw a significant Pullback in equity indices, e.g. Russell 2000 Small Cap, S&P500, etc. However, other asset classes were not exhibiting same price movements. In fact, some fixed income indices experienced no pull back and traded at all-time highs. Alternatives also experienced non-correlation benefits. The media (i.e. CNBC) would have you believe that investing begins and ends with only large cap domestic stocks. Diversified investors don’t need to get caught up in their obsession.
  • History shows that Bull markets typically last greater than 5 years on average and Bears about a quarter of that. Bear markets experience more volatility, given the fear that usually surfaces during these times. Bull markets don’t end based on a particular time frame, but instead end from an external shock (e.g. overvaluation/bubbles, inflation, etc).
  • Bull & Bear markets are driven by greed and fear as much as economic fundamentals. Humans are not wired for disciplined investing, hence investors can help themselves gain discipline by using a wealth manager like DWM to focus on the things that one can control, and avoid emotional, poor decisions based on things one cannot control.
  • Trying to predict short-term markets is virtually impossible. Markets don’t necessarily correlate with current economic data. The world has changed and old formulas and rules of thumb may not apply. Global concerns can cause investors’ appetite for risk to diminish overnight. However, over the long-term, the markets have rewarded discipline, through world events of all types.
  • Trying to time the market is a fool’s game. Studies show that missing just a few days of strong returns can drastically impact overall performance.
  • Your financial adviser should help you focus on what you can control. This includes creating both a financial plan and an investment plan. You also need to stress test these plans. And, then you need to review your risk profile- which is a combination of risk capacity, risk tolerance, and risk perception.
  • The markets cannot be controlled, but asset allocation can be. Asset allocation is the primary driver of returns. Once you have your risk profile, you are in a position to construct an appropriate asset allocation target mix. Use of multiple asset classes (equities, fixed income, alts) lead to non-correlation benefits. Non-correlation leads to a smoothing effect to your return profile which means smaller downsides. Smaller downsides lead to better geometric compounding, hence better LONG-TERM RESULTS. The chart below shows the impact of downside volatility and why one wants to avoid that.
  • Seminar slideFocus on things you can control:
    • Create an investment plan to fit your needs and risk tolerance
    • Identify an appropriate asset allocation target mix
    • Structure a well-balanced, diversified portfolio
    • Reduce expenses through low turnover and via passive investments where available
    • Minimize taxes by asset location, tax loss harvesting, etc.
    • Rebalance on a regular basis, taking advantage of market over-reactions by buying at low points of the market cycle and selling a high points
    • Stay Invested

Using a dedicated and caring financial advisor can keep you focused on the above items and more. Most importantly, an advisor like DWM can keep you and your portfolio disciplined so you can reach your long-term financial goals.

LGD seminar2

Time for a Stock Market Correction?

bullsvsbearThe overall calm, positive performance of financial markets in 2014 took a hit on July 31st when stocks declined 2-3% and fixed income and alternatives lost about 1%. Markets have been about flat since then, yet talk about a stock market correction of 10% or more has escalated.

There’s lots of reasons why some believe a correction could happen:

  • Valuations of stocks are high. The current P/E ratio of the S&P 500 is 15.7- higher than the 10-year average of 14.1
  • Improving U.S. economic conditions have brought concerns about the Fed raising rates quicker than many investors anticipated
  • Europe’s prolonged economic slump is making deflation a concern
  • Economic sanctions against Russia could negatively impact consumer demand in many countries
  • Geopolitical unrest in Iraq, Gaza, Syria, Ukraine, etc. could explode

Yet, at the same time, there are many reasons why some believe the bull market should continue:

  • The U.S. economy is the best in years: new jobs are up, unemployment is at 6.1%, job openings are at a seven-year high, housing is up again after a slow start in 2014, car sales are at post-crisis high, and consumer sentiment is up
  • There has been a huge recovery in American corporate revenue and profits since the 2008-2009 crisis. Yes, lower borrowing costs helped. Second quarter earnings, with nearly 90% of S&P 500 companies having reported, are on track to grow 8.4% this year
  • For a variety of reasons, companies are continuing to buy back large quantities of stock
  • Market peaks have occurred historically when P/E ratios are 25 times earnings or more
  • Geopolitical worries have boosted the allure of “safe” bonds. With U.S. 10-yr bonds at 2.4% and German 10-yr bonds at 1%, stocks continue to be very attractive

Overall, it has been suggested that we are in a “Goldilocks” economy. One that is “not too hot, not too cold.” Stimulative policies, created by Fed Chairman Ben Bernanke and now Janet Yellen have created a great environment for stock growth. However, when investors get nervous about the Fed’s ability to keep the “temperature just right” we have seen big swings. May and June 2013 saw 5-6% drops when the Fed first started talking about “tapering” the QE program. Now, with the economy doing better and inflation nearing 2% targets, investors are concerned that the Fed will start to raise interest rates and change our “just right” conditions. That’s a huge challenge for the Fed. A perceived major misstep or miscommunication by the Fed could again shake the markets.

Yes, at some point we will have a correction in the stock market. History tells us they come along regularly (27 corrections of 10% or more since 1945). Yet, a priori, the reasons were enigmatic. Hence, trying to time the start and finish of such events is useless.

We have a saying at DWM: “There are many variables you cannot control. Long-term success, on the other hand, relies on managing the variables you can control, including reviewing your risk profile and asset allocation, reducing expenses, diversifying portfolios, minimizing taxes, and staying invested.”