What Yogi Berra would have said about this bull market
Market cycles can last years and turning points are few. So how do we know if stocks are nearing one?
It’s late in the market cycle.
In the past week, at least six professional investors have told me that—and they are probably right. This bull market for U.S. stocks is by far the longest on record, and only a lunatic would think it can last indefinitely.
How late is it and what, if anything, should investors do to protect themselves?
The S&P 500 hasn’t fallen by at least 20% from a previous high since March 2009. As commonly defined, this bull market is nearly 3,750 days old, the longest in the S&P 500’s morethan-90-year history. That’s twice as long as the average bull market, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. Since 2009, stocks have more than quintupled, counting dividends.
Stocks will stop going up. You can be as sure of that as you are that the sun will set in the west.
Unlike today’s sunset, however, you can’t know exactly—or even approximately—when the bull market will end.
Because market cycles tend to last for years, major turning points are few and far apart. There is little comparability in the history of these inflection points, making it hard to draw firm conclusions.
Or, as Yogi Berra might have said if he played the market: All we can know for sure is that it’s later in this cycle than it used to be.
And cycles can last for a remarkably long time. Australia hasn’t had a recession in nearly 28 years.
U.S. interest rates have been falling almost continuously since 1981—longer than many bond investors have been alive.
Naturally, what you expect depends on what you have experienced.
The investment thinker Peter L. Bernstein, who died in 2009, often spoke of “memory banks,” the collective experiences that investors live through and that live on in their minds.
In the 1950s, portfolio managers argued that stocks weren’t worth owning unless their dividend yield exceeded the yield on long-term bonds. That’s what their memory banks told them. Yet in 1958, the dividend yield fell below the bond yield— and stayed there for the next half century.
In the late 1990s, young investors believed internet stocks would soar ever higher—as they had already done for years. Those memory banks also failed. After 10 bullish years in stocks, some younger investors have no memory of losing serious amounts of money.
That could make them think it can’t happen. Saying “this time is different” is easier when you compare it to a previous time you didn’t live through yourself.
As Fred Schwed Jr. wrote in his book “Where Are the Customers’ Yachts?” in 1940: “There are certain things that cannot be adequately explained to a virgin either by words or pictures. Nor can any description that I might offer here even approximate what it feels like to lose a real chunk of money that you used to own.”
For now, at least, complacency seems to be more common than enthusiasm, suggesting the market isn’t about to overheat. “I don’t think there are that many people out there saying this is the last best chance to buy stocks because they’re going to the moon,” says Howard Marks, co-chairman of Oaktree Capital Management and author of “Mastering the Market Cycle.”
He adds, “I just don’t think the psychology is that euphoric right now. Most people are not risk-oblivious.”
Some warning signs are flashing, however. With unemployment at half-century lows and consumer confidence high, “there’s no slack in the economy,” says Doug Ramsey, chief investment officer at the Leuthold Group in Minneapolis. Companies can’t easily keep increasing profits after they’ve already tapped all available resources. “Economic growth is still relatively high, but the pace has been decelerating, putting us closer to the turning point,” says Andrew Ang, head of factor investing strategies at BlackRock Inc. “This is a time when investors should seek resilience in their portfolios.”
Granted, the same has been said often over the past decade. But, if you are worried that it is late in the cycle and the bull can’t keep running for much longer, you could take a few small steps.
First, you can favor international stocks, which on average offer significantly higher dividends and lower valuations than U.S. stocks.
You could also tilt a bit toward so-called quality companies that earn high and stable profits with low levels of debt, as well as toward low-volatility stocks whose prices tend to fluctuate less sharply than market averages.
Such companies have outperformed slightly in economic slowdowns and recessions, say Jesse Barnes and Chris Covington, who manage systematic strategies at HighVista, an investment firm in Boston. However, they tend to underperform as the economy recovers and expands.
So any changes you do make should be incremental rather than drastic. Protecting against losses if this bull market keels over could also restrict your gains when the next one starts to run again.
“For investors, making significant changes based on where we seem to be in the cycle is almost always a really bad idea,” says Mr. Barnes.