USA TODAY International Edition
Investors face riding an old bull
Strategy ideas abound for a likely final phase
Where do you put your money now? That’s the quandary facing investors as the bull market for stocks grays around the horns. It’s 9 years old now, nearly double the five-year average for bulls since 1929.
Nobody knows when the long rise in stock prices will end, but many Wall Street pros believe it is in its final phase.
So how do you ride an old bull?
1. Use history as a guide
Buy what worked in the past. A look back at the performance of the Standard & Poor’s 500 stock index in the final six months of the 1990, 2000, 2007 bulls, as well as the lead up to January’s market peak, shows three clear winners: technology stocks, which rose 30.3%, on average, according to S&P Capital IQ; industrial companies, such as aerospace, defense and construction-related stocks, which gained 14%; energy stocks, which rose 12.5%.
2. Avoid rate-sensitive stocks
When borrowing costs are on the rise and the Fed is hiking short-term rates, stocks most sensitive to rising rates tend to fare poorly. So do stocks that people buy because they pay plump dividends, as those shares become less attractive relative to bonds with rising yields.
Utilities, including electricity providers that pay sizable dividends, were the worst-performing industry group in the final six months of recent bulls, tumbling 2.4% on average, S&P Capital IQ data show. Real estate-related shares have posted losses of 1.4%, largely because higher mortgage rates make homes and other real estate less affordable.
“Rate-sensitive stocks tend to struggle as the Fed is usually in full swing,” says Sameer Samana, global equity strategist for Wells Fargo Investment Institute.
3. Cozy up to consumers
Good times for the U.S. economy mean more shoppers with more job security and money to spend. As is often the case late in a bull run, U.S. unemployment is low. At 4.1%, it is at its lowest level since 2000. Shares of companies that sell discretionary goods, like jewelry, furniture and cars, have rallied an average 10.8% in the six months leading up to bull market peaks since 1990.
4. Follow the leaders
Another strategy with upside is to buy popular stocks that are leading the market higher. It is not uncommon for just a handful of stocks to account for the bulk of the market’s rise late in a bull, a phenomenon dubbed a “narrowing” of the market. At the end of February, the 10 biggest stocks in the S&P 500 stock index, including well-known names like Amazon, Microsoft and Apple, were responsible for nearly half (45%) of the index’s year-to-date performance, up from 27% in 2016, according to Strategas Research Partners.
5. Cash in on ‘profitable’ stocks
Volatility spikes in the later stages of a market upswing. As swings grow wilder, investors gravitate to stocks with strong profits. “They tend to be relatively safe harbors during volatility storms,” says Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. Stocks that ranked high for overall “profitability” factors include Apple, credit card processor Mastercard and drug maker AbbVie.
6. Invest in a broad index fund
If stock picking isn’t your strength, you can invest in a low-cost fund that tracks a broad index like the S&P 500. The large-company stock index has posted average gains of 13% in the final six months of bulls analyzed by S&P Capital IQ.
A 13% gain is 3 percentage points better than the long-term, average annual gain of 10%.
7. Profit from policy
This bull’s final days are being influenced by policy moves by President Trump, such as corporate tax cuts and threats of import tariffs on steel and aluminum. One beneficiary of a shift toward a more protectionist trade stance are U.S. small company stocks. They get their sales almost exclusively in the U.S., which means they will be hurt less if a global trade war breaks out. One way to gain exposure to small stocks is to invest in an index fund or ETF that tracks the Russell 2000, a well-known small cap index. The new law that slashed the corporate tax rate to 21% from 35% will also create winners, according to Bob Doll, chief equity strategist at Nuveen Asset Management. One stock he says will be a “clear beneficiary” of lower taxes and stronger consumer spending is Comcast, the media, entertainment and communications company.
8. Recession-proof your portfolio
It’s been nearly nine years since the Great Recession, but an economic contraction will hit eventually. Once Wall Street starts to anticipate the next recession – the No. 1 bull market killer – the stocks to own are those deemed “defensive,” or ones that sell everyday products like soap and toothpaste, and health care companies. One health care name to consider, Nuveen’s Doll says, is Cigna. The health insurer, which recently merged with Express Scripts, the nation’s largest pharmacy benefit manager, is poised to benefit from cost savings and expanding profit margins, he says.
9. Do not go ‘all in’
What investors shouldn’t do is have all of their money in stocks. Why? Every bull market eventually tops out, paving the way for the next bear market, or drop of at least 20%. The average bear market decline is roughly 40%.