Life of a Bull Market
By Mark F. Toledo, CFAAugust 31, 2018
Life of a Bull Market
The financial media has highlighted the US large cap stock market’s achievement of the longest bull market recorded. The S&P 500’s advance started in March 2009 with an index level of 666 in the wake of the financial crisis.1 Over the next 9.5 years, the S&P 500 has produced a total return of more than 330% without a greater than 20% decline - the common definition of a bear market.
As noted above, the longest bull market title refers to US large cap stocks. Other sectors of the global equity market have experienced bear markets over the past 9.5 years. US small cap, foreign developed market stocks and emerging market equities each experienced greater than 20% declines from March 2015 to June 2016. The next bear market for US large company stocks may not be accompanied by greater than
20% declines in all other sectors of the global equity market.
Edward Yardini, PhD in economics and investment strategist, recently published a report that focused on the following statement: “Bull markets don’t die of old age.”
2 His research shows that the duration of a bull market has no predictive value. He notes that rising earnings (E) drive bull moves. Bear markets occur when earnings decline in a recession and P/E ratios contract as a result of fear about the future. Eventually, investors regain confidence and drive the P/E ratio higher in anticipation of an uptrend in earnings - ending the bear move.
US Economy
Yardini focuses on the health of the economy for insight to the fitness of the equity market. He forecasts that the current economic expansion could continue through July 2019, which would make it the longest one on record. The following comments summarize his thoughts on four areas of interest.
Bearish commentators have been warning that the flattening of the yield curve increases the risk of a recession. Yardini notes that the yield curve is just one of the 10 components of the Conference Board’s Index of Leading Economic Indicators (LEI). In aggregate, the LEI series has been setting fresh record highs for the past 17 months through July.
“Bull markets don’t die of old age.”
- Edward Yardini, PhD
Yardini presents an optimistic scenario for global trade. He opines that: “President Trump has unilaterally called a ceasefire in his trade war with Europe. Progress is reportedly being made in negotiations with Mexico. Talks will resume with China later this month. Perhaps it’s time to stop using the adjective ‘escalating’ to describe the trade war? What if this all leads to less protectionism once the fog of war clears?”
Some economists have been expecting rising labor costs and commodity prices to squeeze profit margins. Additionally, they have been sounding the alarm that rising costs will boost inflation, which would send bond yields higher. Yardini acknowledges more signs of mounting inflationary pressures. He notes that rising cost pressures and profit margins, without discernably higher price inflation, present “a curious set ofcircumstances.” He postulates that increasing productivity could finally be making a comeback. Additionally, the strong dollar reduces inflationary pressures.
Finally, Yardini notes that the rate of earnings growth should decelerate from above 20% in 2018 to under 10% in 2019. However, he emphasizes that earnings should continue to grow in record-high territory in 2019. He believes that stock prices should accompany earnings to new highs.
Sensible Actions
Jason Zweig, a columnist for the Wall Street Journal, recently published an article titled No, Stocks Aren’t Cheap, but Don’t Act Rashly.3 He notes that: “2018 is full of uncertainty and teeming with hazards that might make the stock market crash. So was 2017. So were 2016, 2015, 2014 - and every year since stockbrokers first gathered in New York in the early 1790s.”
Psychologist Daniel Kahneman received the 2002 Nobel Memorial Prize in Economic Sciences for his behavioral economics work. He states that one of the keys to successful investing over the long run is to minimize your potential to feel regret. The bigger, more frequent and more sudden the steps you take, the more opportunities you create to look back later and regard them as mistakes.
However, feeling regret can also result from not responding to your concerns. You can reduce this potential by taking small, gradual and thoughtful actions within the framework of a long-term investment plan. This approach can offer some peace of mind during periods of higher anxiety.
Zweig advises that you start by evaluating the risks in your portfolio in the broadest possible light. “If you have both some spare cash and a mortgage, use the cash to pay down or pay off the home loan. Extinguishing a 4% mortgage provides you a 4% return at zero risk - a deal you’re unlikely to beat anywhere else. Plus, you eliminate the anxiety that debt can cause in an economic downturn.”
If your circumstances have changed and you want to reduce the level of risk in your investment plan, you can progressively decrease the target allocation to equities. You could reduce the long-term equity objective by 5% per quarter or 1% a month. This gradual approach to better aligning your portfolio’s risk and return characteristics with your new situation may help you achieve your goals.
If you have additional funds to invest in equities, you could establish a periodic investment plan. The plan could invest a set dollar amounts at periodic intervals. Alternatively, you can identify specific events that would initiate additional investments.
Periodically re-balancing your portfolio at both the major asset class level (stocks, bonds and cash reserves) and sub-asset classes (i.e. small cap, foreign, etc.) maintains a more consistent risk/return profile for your portfolio over time. Reducing equities during a bull market to replenish cash reserves preserves liquidity for expected expenditures. Re-allocating from US large cap stocks after an extended bull move to small, value and foreign stocks may dampen the effect of an eventual downturn in US equity prices.
The base case probabilities support maintaining a consistent level of equity exposure in portfolios. About 70% of the time, equities advance over a 12-month period, which leaves a 30% probability of decline. The actions suggested in this commentary are consistent with Benjamin Graham’s advice in his book The Intelligent Investor that investors need “some outlet” for their “otherwise too-pent-up energies.”
Mark F. Toledo, CFA is a Partner at Chicago Partners Wealth Advisors. He has been a wealth manager for over 35 years and has helped hundreds of individuals and foundations create better wealth management solutions.
1Wursthorn, Michael, S&P 500 Reaches Bull Run Milestone, Wall Street Journal, Aug. 22, 2018
2Yardini, Edward, The Long Good Bye, Morning Briefing, Yardini Research, Aug. 20, 2018
3 Zweig, Jason, No, Stocks Aren’t Cheap, but Don’t Act Rashly, Wall Street Journal, Aug. 21, 2018
Important Disclosure Information
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.
August 31, 2018
Life of a Bear Market
The financial media has highlighted the US large cap stock market’s achievement of the longest bull market recorded. The S&P 500’s advance started in March 2009 with an index level of 666 in the wake of the financial crisis.1 Over the next 9.5 years, the S&P 500 has produced a total return of more than 330% without a greater than 20% decline - the common definition of a bear market.
As noted above, the longest bull market title refers to US large cap stocks. Other sectors of the global equity market have experienced bear markets over the past 9.5 years. US small cap, foreign developed market stocks and emerging market equities each experienced greater than 20% declines from March 2015 to June 2016. The next bear market for US large company stocks may not be accompanied by greater than
20% declines in all other sectors of the global equity market.
Edward Yardini, PhD in economics and investment strategist, recently published a report that focused on the following statement: “Bull markets don’t die of old age.” 2His research shows that the duration of a bull market has no predictive value. He notes that rising earnings (E) drive bull moves. Bear markets occur when earnings decline in a recession and P/E ratios contract as a result of fear about the future. Eventually, investors regain confidence and drive the P/E ratio higher in anticipation of an uptrend in earnings - ending the bear move.
US Economy
Yardini focuses on the health of the economy for insight to the fitness of the equity market. He forecasts that the current economic expansion could continue through July 2019, which would make it the longest one on record. The following comments summarize his thoughts on four areas of interest.
Bearish commentators have been warning that the flattening of the yield curve increases the risk of a recession. Yardini notes that the yield curve is just one of the 10 components of the Conference Board’s Index of Leading Economic Indicators (LEI). In aggregate, the LEI series has been setting fresh record highs for the past 17 months through July.
“Bull markets don’t die of old age.”
- Edward Yardini, PhD
Yardini presents an optimistic scenario for global trade. He opines that: “President Trump has unilaterally called a ceasefire in his trade war with Europe. Progress is reportedly being made in negotiations with Mexico. Talks will resume with China later this month. Perhaps it’s time to stop using the adjective ‘escalating’ to describe the trade war? What if this all leads to less protectionism once the fog of war clears?”
Some economists have been expecting rising labor costs and commodity prices to squeeze profit margins. Additionally, they have been sounding the alarm that rising costs will boost inflation, which would send bond yields higher. Yardini acknowledges more signs of mounting inflationary pressures. He notes that rising cost pressures and profit margins, without discernably higher price inflation, present “a curious set ofcircumstances.” He postulates that increasing productivity could finally be making a comeback. Additionally, the strong dollar reduces inflationary pressures.
Finally, Yardini notes that the rate of earnings growth should decelerate from above 20% in 2018 to under 10% in 2019. However, he emphasizes that earnings should continue to grow in record-high territory in 2019. He believes that stock prices should accompany earnings to new highs.
Sensible Actions
Jason Zweig, a columnist for the Wall Street Journal, recently published an article titled No, Stocks Aren’t Cheap, but Don’t Act Rashly.3 He notes that: “2018 is full of uncertainty and teeming with hazards that might make the stock market crash. So was 2017. So were 2016, 2015, 2014 - and every year since stockbrokers first gathered in New York in the early 1790s.”
Psychologist Daniel Kahneman received the 2002 Nobel Memorial Prize in Economic Sciences for his behavioral economics work. He states that one of the keys to successful investing over the long run is to minimize your potential to feel regret. The bigger, more frequent and more sudden the steps you take, the more opportunities you create to look back later and regard them as mistakes.
However, feeling regret can also result from not responding to your concerns. You can reduce this potential by taking small, gradual and thoughtful actions within the framework of a long-term investment plan. This approach can offer some peace of mind during periods of higher anxiety.
Zweig advises that you start by evaluating the risks in your portfolio in the broadest possible light. “If you have both some spare cash and a mortgage, use the cash to pay down or pay off the home loan. Extinguishing a 4% mortgage provides you a 4% return at zero risk - a deal you’re unlikely to beat anywhere else. Plus, you eliminate the anxiety that debt can cause in an economic downturn.”
If your circumstances have changed and you want to reduce the level of risk in your investment plan, you can progressively decrease the target allocation to equities. You could reduce the long-term equity objective by 5% per quarter or 1% a month. This gradual approach to better aligning your portfolio’s risk and return characteristics with your new situation may help you achieve your goals.
If you have additional funds to invest in equities, you could establish a periodic investment plan. The plan could invest a set dollar amounts at periodic intervals. Alternatively, you can identify specific events that would initiate additional investments.
Periodically re-balancing your portfolio at both the major asset class level (stocks, bonds and cash reserves) and sub-asset classes (i.e. small cap, foreign, etc.) maintains a more consistent risk/return profile for your portfolio over time. Reducing equities during a bull market to replenish cash reserves preserves liquidity for expected expenditures. Re-allocating from US large cap stocks after an extended bull move to small, value and foreign stocks may dampen the effect of an eventual downturn in US equity prices.
The base case probabilities support maintaining a consistent level of equity exposure in portfolios. About 70% of the time, equities advance over a 12-month period, which leaves a 30% probability of decline. The actions suggested in this commentary are consistent with Benjamin Graham’s advice in his book The Intelligent Investor that investors need “some outlet” for their “otherwise too-pent-up energies.”
Mark F. Toledo, CFA is a Partner at Chicago Partners Wealth Advisors. He has been a wealth manager for over 35 years and has helped hundreds of individuals and foundations create better wealth management solutions.
1Wursthorn, Michael, S&P 500 Reaches Bull Run Milestone, Wall Street Journal, Aug. 22, 2018
2Yardini, Edward, The Long Good Bye, Morning Briefing, Yardini Research, Aug. 20, 2018
3 Zweig, Jason, No, Stocks Aren’t Cheap, but Don’t Act Rashly, Wall Street Journal, Aug. 21, 2018
Important Disclosure Information
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.