The S&P 500 has been rising for almost 10 years, and on August 22nd, it officially became the longest U.S. bull market in history, reaching 3,453 days from its humble beginnings on March 9, 2009.
Where do we go from here? How much longer will this last? Will there be a downturn soon? These are all good questions with no concrete answers. Frank’s article ties in to this theme and will discuss late-stage cycle investing.
Even amongst the investment community, the opinions are more conflicting than ever. Certain investment firms are still positioning for growth, whereas others are moving towards capital preservation. We met with wholesalers from investment companies who think a downturn is imminent, and ones who think this bull market still has 4-7 years left. One global equity fund might be up 15% year-to-date, another might be down 3%.
Last week, one of the largest global equity managers in the country sent out a letter addressing the current state of the markets.
“…we don’t know when this bull market will end and how severe the downturn will be. Central banks are the prime culprits for the current state-of-affairs and may continue to focus on shorter-term stock market symptoms at the expense of longer-term economic fundamentals. Valuations are significantly more expensive than before the last bear market, but that doesn’t necessarily dictate the timing or the degree of the next downturn. Despite already being the longest bull market in history it could continue for a number of years. On the other hand, it could end tomorrow. The eventual downturn could be less severe than the Great Financial Crisis or it could be worse; no one knows. But it’s precisely this uncertainty that warrants caution.”
The statement above demonstrates the uncertainty that presents itself in the later stages of a market cycle. We agree with the overall message of this manager – caution is warranted, now is not the time for more aggressive allocation.
At the same time, we don’t want to be too careful. Adjustments to a portfolio are justified, but not a full retreat. The Globe & Mail ran an article that shows investors don’t do well by jumping out of markets simply because they are at a high. Here’s an excerpt:
“Charlie Bilello, director of research at Pension Partners LLC in New York, recently offered a fun way to look at the numbers. He calculated what would have happened to a U.S. investor who went back in time and loaded up on stocks. This hypothetical investor would have sold his stocks every time a bull market became the longest on record, then bought back into the market after it declined at least 20 per cent. From 1932 to the present day, this in-and-out investor would have turned US$10,000 into US$11.6-million. Not bad, you might think. But here’s the catch: An even simpler strategy of buying the S&P 500 and holding on, without ever selling, would have turned that initial $10,000 into US$139-million.”
Studies like the one above have shown time and time again that trying to outsmart and time the market is a losing endeavour.
Lastly, let us remind ourselves of the positives: persistently subdued inflation, a signal from the U.S. Federal reserve to end rate hikes, easing trade tensions, and a lasting trend in better-than-expected economic and earnings data. Fundamentally, the U.S. economy is in good shape.
We can not predict what will happen in the short-term. We can only adhere to tried and tested investment principals: invest in quality, be diversified, and think long-term.
This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.