A look at the bull market
March 9, 2009 marked the start of what has now turned out to be the longest bull market in the history of the S&P 500 with yesterday (Wednesday, August 22) representing 3,453 days without a bear market correction (20% pullback or greater).
Who would have thought that after a more than fifty percent drop in the S&P 500 from October 9, 2007 through March 9, 2009 that stocks would have gone on such a tear? That said, despite the longevity of this bull, returns pale in comparison to the bull market that culminated in March 2000 at 3,452 days in which that index rose 417%. This bull has risen “just” 323%. Moreover, it is helpful to know that bull markets historically do not die of old age but rather from too many interest rate hikes from the Fed, inflation, misdirected placement of capital or an overheating economy, none of which are currently front burner items.
That said, after a tripling in most major averages and given such headwinds as trade tensions and battles in Washington, DC it pays to maintain proper diversification and even hold a bit of cash.
Below is an article that we penned for The Record back in March 2009 as the stock market was bottoming. We thought it might add perspective.
“Beginning this past Wednesday and continuing through the end of April, U.S. Federal Bank and Thrift Supervisors will be conducting an extensive analysis of banking institutions with assets greater than $100 billion to determine if such banks have sufficient capital buffers to withstand “the impact of an economic environment that is more challenging than is currently anticipated.” According to this agency, this assessment will test financial institutions under a “baseline scenario [that] reflects a consensus expectation among private forecasters and the more adverse scenario [that] reflects a deeper and longer recession.” The more adverse scenario includes unemployment rates above ten percent and a housing market that continues to decline.
With this in mind, we believe that investors should conduct their own ‘stress test’ to determine whether or not the current allocation of their assets can withstand a stock market that continues to decline. The question that this stress test should answer is “if the stock market declines another twenty percent from its present level of approximately 7,270 on the Dow Jones Industrial Average and remains at this subdued level of approximately 5,800, will my standard of living be impacted, and, if so, to what extent?”
When performing the above referenced stress test, be careful to include all of your assets that can produce income such as a Defined Benefit Pension Plan, Social Security, and the values of your 401(k), 403(b) or other Employer Sponsored Defined Contribution Plan. If you are already retired, include a conservative value of your home for a potential reverse mortgage. On the liability side, don’t forget your daily living expenses as well as entertainment costs and gifts in addition to housing costs, insurance costs, energy costs and the cost of your automobile.
If the outcome of your own stress test indicates that your life will not change, then ignore the noise coming out of the financial markets and focus on what is really important, your life. If, however, a decline to this extent would impact your standard (quality) of life, then perhaps you should make some changes to your investment portfolio. Or, if you are retired, perhaps what you will leave to your heirs might need to be adjusted. If such an unanticipated “adverse scenario” becomes a reality, tough choices, like this, might be necessary to preserve your standard of living.
The probability of such a scenario is relatively low, less than twenty-five percent, but if you were to conduct such a stress test, it may allow you to invest more appropriately for your needs without the mental highs and lows that are part and parcel of a bear market.
Finally, if you pass your own stress test, be patient and let time heal our economic woes. We realize that this may be difficult because we live in a mediasaturated country, a country where instant gratification is the rule rather than the exception, in a country where solutions such as liposuction and diet pills garner attention rather than diet and exercise. Once again, we ask that should you pass your own stress test, be patient and tune out the daily noise.” Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call (518) 279-1044.