- Dave Moenning
- 11 Oct 17
Don’t look now fans, but the United States is enjoying one of the longest economic expansions in history. In fact, First Trust tells us that if the economy can avoid slipping into recession for the next 18 months, this will become the longest period of economic growth on record. Granted, the pace has been maddening at times, but it is important to recognize that the economy appears to be doing just fine, thank you.
It is also worth noting that the stock market has been a stellar place to be invested over the last eight years. According to my calculator, the S&P 500 is up more than 280% from the March 9, 2009 crisis-low. However, I will admit that it was rough sledding there for a while after the crisis ended.
On that note, if we look at the gains in the market since the 2011 low, which occurred after the first couple go-rounds with Greece and the downgrade of U.S. debt, we find that stock market investors have enjoyed a “double” with the S&P sporting gains of more than 125%.
Even if one waited to invest in stocks until the most recent mini-bear ended in February 2016, their gain would now be approaching 40%. Not bad. Not bad at all.
And yet, investors remain nervous that the bad old days of 2000-02 and 2008 will return at any moment. Financial advisors are no different. I had meetings with 6 different financial professionals last week and to a man, they all believed stocks were sure to enter a bear market any day now.
From a behavioral perspective, I believe this represents a classic case of “recency bias,” which is the tendency to believe that the recent trends will continue in the future. As such, advisors and investors alike are adamant that they will be ready for the bears this time around.
The bottom line is nobody wants to see their 401K turn into a “201K” ever again!
Fighting The Last War
In my experience, this is called “fighting the last war.” You see, one lesson I’ve learned in my 30+ years of professional investing is that the next bear market is unlikely to look anything like the last one.
During my career, there have been several meaningful declines in the stock market. First there was the “Crash of ’87,” which was triggered by computers and something called “portfolio insurance.” In 1990, stocks declined in response to the first Gulf War. Next was the flirtation with recession in 1994. Then the Russian debt default/LTCM crisis in 1998. Next up was the bursting of the Tech Bubble of 2000-02. Then the Credit Crisis of 2007-early 2009 which was caused primarily by the alphabet soup of derivatives, a bubble in the housing market, and mark-to-market accounting.
The point here is that none of these declines mirrored the prior one as there was a new set of problems to deal with each and every time the bears took control of the game.
Will This Time Be Different?
The question, of course, is if it will be different this time around. My guess is the answer is no. For example, just about everyone, everywhere in the game has been busy looking for the next bubble – because nobody wants to be fooled again. So, in my opinion, it is a pretty safe bet that the next bear won’t have anything to do with housing or bubbles of any kind.
I also believe it is important to recognize that the stock market is currently in a secular bull trend. The key here is to recognize that, according to Ned Davis Research, cyclical bear markets that occur within an ongoing secular bull cycle tend to be shorter and shallower than both the average bear market (which sees losses of -30.6% on the DJIA) as well as the bears that occur when stocks are in the grips of a secular bear cycle.
For example, the average decline for the DJIA during cyclical bear markets that occur within a secular bear has been -36.3%. However, cyclical bears taking place within a secular bull trend create an average loss of just -21.8%. If my math is correct, this means that bear markets taking place within a secular bull trend are 40% less severe than the bears that occur in a secular bear and 29% less damaging than the average bear seen since 1900.
So, the good news is that even if the bears do find a raison d’etre in the next year, history suggests the damage isn’t likely to be as severe as what was seen in 2008.
The takeaway here is that brutal bear markets – like the declines seen in 2000-02 and 2008 – are actually pretty rare. In addition, bear markets usually need a trigger or a “reason” to begin. Remember, stocks don’t dive just because the bulls have been in charge for a long period of time. And finally, since stocks are currently in the midst of a secular bull trend, the next bear isn’t likely to look like the last one.
Thought For The Day:
It is best to deal with your problems before they deal with your happiness. –Unknown
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Tax Reform
2. The State of the Economic/Earnings Growth (Fast enough to justify valuations?)
3. The State of Fed Policy
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.
The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.
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