With minor interruptions, S&P 500 stocks have been rising since mid-October, 2022.Brendan McDermid/Reuters
No, bear markets have not become extinct. It just seems that way.
With minor interruptions here and there, S&P 500 stocks have been rising since mid-October, 2022. That’s a long run, but by no means the longest in history. The recovery from the financial crisis of 2007-09 lasted almost 11 years and was only stopped by the onset of the COVID-19 pandemic. It lasted almost 4,000 days and boosted the S&P by 400 per cent by the time it was over.
The current bull market started Oct. 12, 2022, so as of July 1 it was 1,357 days old. Just a kid! Well, maybe a teenager.
The point is that investors can be forgiven if they believe this bull still has legs. They may well be right. When bull markets die, the demise is often triggered by a cataclysmic event, such as COVID or the imminent collapse of the global financial system.
Sometimes, however, they just die of old age.
The war in Iran has the potential to turn into a bull-ending event with the resumption of fighting and President Donald Trump’s threats to destroy the country’s infrastructure.
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One thing we do know is that returns in the second half of a bull market are lower than in the first half.
“From a rate of appreciation perspective, the current bull run appears somewhat ahead of itself,” writes Noah Solomon, CEO of Outcome Metric Assessment Management in Toronto, in his monthly report to investors.
“In its 1,357 days of existence, the S&P 500 index has delivered a total return of 123.2 per cent, as compared to an average return of 104.8 per cent over the same period during the three previous bull markets. Only the post-global financial crisis bull run had a greater rate of ascendance, returning 125.4 per cent over its initial 1,357 days. However, when equities troughed in March, 2009, the forward P/E ratio of the S&P 500 was approximately 11. Once investors became comfortable that the world was not collapsing, bargain basement prices and hyper-stimulative monetary policies served as rocket fuel for stock prices. In contrast, the current bull run began with a P/E ratio of over 16 and current rates are particularly accommodative, which make this bull market’s pace of gains appear somewhat anomalous.”
The result, he believes, is to leave investors caught in a trap between FOMO (fear of missing out) and FOL (fear of losses).
“I am nearly 100 per cent certain that at some point, something will cause the current bull market to end,” Mr. Solomon says.
The critical question is when!
“What I can offer is that bull markets tend to behave in a similar fashion as automobiles – although they can last for a long time, they tend to show wear and tear after the first few years … The corollary is that although stocks may very well have some gas left in the tank, the current uptrend is likely past its prime. If this 1,357-day bull market lasts another 1,357 days, it is unlikely to deliver the same 123.2-per-cent gain. The rock of missing out, although clearly present, has shrunk, while the hard place of losses has grown.”
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So, what should you do about this rock-and-a-hard-place situation? Here are two suggestions.
Take some profits. We have recently recommended taking half profits on some positions in my Internet Wealth Builder newsletter. That’s because we have some huge gains on our recommended list and we don’t want to see them wiped out. Remember that once the pandemic ended, many stay-at-home stocks that had scored huge gains collapsed when life returned to normal. Roku, DocuSign and Teladoc Health are examples. Taking part profits now enables you to consolidate gains while retaining exposure to potential future growth.
Reduce risk exposure. Everyone’s portfolio is different when it comes to risk. It’s a trade-off between profit potential and loss of value. It’s a tough decision, the classic greed vs. fear, but it’s one that must be made and applied consistently.
Aggressive investors, including those who believe this bull has a way to run, will overweight their portfolio toward equities. You can still lower your risk in so doing by substituting some lower-risk value stocks (e.g. utilities, banks, pipelines) for those which have produced big gains (e.g. info technology).
Conservative investors will have a higher weighting of fixed-income securities and cash. Derisking in this case could involve reducing overall duration in the bond portion of your plan. Duration is a measure of risk; the shorter, the safer.
The important thing is to be ready when the bull ends. It’s coming. Since we don’t know when, adopt the Scout’s motto: be prepared.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.