2017 saw the the S&P 500 return +21.80% and the start of this year, the raging bull continued on up. However, the upward surge was abruptly interrupted at the end of January after hitting a high on the 26th. We saw a couple of -4% trading days and a very quick correction in the markets occurred. Since then we've seen continued volatility and no clear signs as to whether there would be the resumption of the bull run or more losses to come. So is this just a correction or is the bear market beginning?
I don't have a crystal ball, so I can't answer that with certainty! However, what I can say is that the positive fundamentals are still with us. Usually, but not always, a recession is accompanied by a bear market (a 20% drop from a previous high). However, economic data is strong world wide and we are not on the brink of a recession. There is no major systemic banking crisis either, so I don't see a drop in the 35-50% region like we saw in 2008 with the GFC (Global Financial Crisis). I am of the opinion we simply had/are having a correction. It was needed after 2017 and the start we had in 2018. I said as much in my 2018 outlook (see here if you haven't read it yet) published just 2 days before we reached the stock market high. I say that not to brag, again, I don't have a crystal ball remember, and also again, I look at investing from a long term perspective. I remind everyone of my 2018 outlook because I still maintain what I said then. We were due a correction, and that is exactly what this is now. I think at some point, be it next week or next month, likely to see the bull market resume, and below I highlight why.
Warren Buffett is often quoted as saying “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”. Investing, successfully anyway, is a long term exercise. This current bull market has been going on for around 9 years, but I believe it still has a couple more years to go. We're not in bear market territory just yet.
If we agree with Warren Buffett's mantra, then really it shouldn't matter too much if this correction turns and the bull market resumes, or if we see a continued slump now and a bear market begin, because in the long term we should look to buy and hold quality investments. Looking at the bigger picture of investing, it is time in the market, not timing the market, that counts.
I've been looking back through history, and we of course know that Warren Buffett is right. It is not an accident or through good luck that he is one of the richest people on the planet. As I've often pointed out, try and spot Black Monday or even the Great Depression looking at the 100 year chart of the US stock market. Looking specifically at bull and bear markets, I've studied the below, sourced from First Trust Advisors L.P. and Morningstar, and you can see that looking at past bull markets, there are 4 that have lasted significantly longer than this current one. They also posted total returns in excess of +800%, which dwarf the current bull market returns considerably.
The full article on the history of bull and bear markets that I've posted, can be viewed here.
So I'm not necessarily saying that there are 4 or 5 more years and another +400% returns to come, however I do think that this demonstrates that a prolonged bull market can still continue from here. As I said at the start of the year, I see no reason why stocks can't continue to go up for another 1-2 years at least, as long as we have a correction soon. Well we've had that correction, so at some point in the near future, I think that positive returns will be reaped for those still invested. We have the next Fed meeting coming very soon and announcements regarding the American economy and probable interest rate hikes. Let's see what effect that has on the markets. But if you're in it for the long run, like Warren Buffett, myself, and many others are, then the short term noise won't affect you in the long term. I leave you with words of wisdom from legendary investor Peter Lynch: "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves".
Author: Ian Pryor
Any questions and feedback welcome. For enquiries or advice please contact me via Linkedin or at ianpryor@ippfa.com