Market Musing

Looking back

Measured by the broad indices, the domestic stock market is in a 51/2-year bull market.

Between 2000 and 2002 the S&P 500 Stock Index and Dow Jones Industrials Index declined approximately 45%. A decline of this magnitude has occurred four times [in the past 100 years?]. That is, a decline this large typically happens once in a generation.

At some point in each decade the major indices have experienced a decline of 10 – 20 %.

But the same indices have risen in 3 of every 4 years since 1924.

All major asset classes (domestic equities large and small, international equities, real estate, government bonds, corporate bonds, etc.) have had positive returns over the last 5 years.

Thinking ahead

Call me a spoilsport, but experience suggests that everything does not rise endlessly. The typical bull market lasts fewer than 4 years; so 5+ years into the current bull market, a decline may be overdue.

When you continue to cover up little problems, a big problem often rears its head. For example, there is probably more bad news to come from the banks and brokerages. They have been in a feeding frenzy and are reluctant to stop.

I’m guessing we will have a stock market correction, with the S&P and the Dow dropping10 – 20%, maybe even within the next 12 months.

Why this is okay

Corrections are both inevitable and essential to the stock market, essential to better and more “ups.”

Stock market investments are long-term investments, money not to be touched for at least 5 years. Historically, stock market investments have appreciated, substantially, over the long term. Knowing how the market “misbehaves” in the short term should give you comfort.

Read the paragraph above again. Especially the part about “at least five years”!

Okay, but what to do?

• Make sure you are comfortable with your allocations to each asset class–comfortable for you personally, not what a magazine article recommends.
• Use international bonds (government and corporate) in conjunction with domestic bonds.
• Know whether your bond fund managers have been allocating to international currencies (a practice better left to the pros; don’t try this one at home!).
• Know whether your bond fund manager has an allocation to TIPS (beneficial in inflationary periods but you don’t want to buy later).
• The real estate sector is down; perhaps an opportunity to expand your allocation.
• In a recession share prices of large multinationals (you know, Proctor and Gamble, Altria – the makers of stuff we can’t do without) tend to hold up best. Where do these fit into your portfolio?
• A market downturn in the U.S. does not necessarily mean a downturn elsewhere. By most indicators, developed foreign markets do not show the same signs of weakness. So make sure you are allocated with great managers who know where to find value internationally.
• If you go into the oil and gas sector, ask yourself if you should you be in stocks of companies, the commodities themselves, or funds that buy oil and gas futures? Again, I advise leaving most of this stuff to professional managers; don’t try it at home.

Final thought

Based on experience, we advise not jumping out of one sector or asset class and into another. That is how individuals lose out in a market dominated by pros and unpredictable forces. No one, not even a pro, knows the when or how much of market movements. But with a long term perspective and proper balance your portfolio will be fine and ready for the next jump upwards.