2014 came to an end with the bull market still intact. The average life span of bull markets since 1930 is 3.8 years, and we have now reached 5.8 years with the current bull market. However, bull markets seldom (if ever) die from old age alone. There are usually imbalances that develop which lead to the end, and that is what we are looking for as we head into 2015.
There is a bullish consensus amongst economists and market prognosticators, and it’s not hard to find a headline predicting another good year for the markets. The reason is because the economic data certainly looks strong:
- 2014 Q3 GDP was just revised upward to a 5% annual rate; the strongest quarterly advance in 11 years, and well above the median forecast of 4.3%.
- The ISM Non-Manufacturing (services sector) Survey for 2014 averaged the highest level in 9 years, and the New Orders Index hit one of the best levels in 17 years.
- The Univ. of Michigan/Reuters Consumer Sentiment surged higher in December and was reported at the highest level in nearly 8 years. The survey found that “Americans [are] hearing more positive economic news in December than at any time in the past 30 years.”
- The Leading Economic Index (LEI) from the Conference Board has risen in 9 of the past 10 months, and is nearing the peak level of the last economic recovery in 2006. Since 1969, the lead time from a peak in the LEI to the start of a recession has been at least 8 months. Until the LEI peaks and falls below its 18-month moving average, the odds of a recession are minimal.
Now that we’ve reflected on the good news, what gives us caution moving forward? History has shown that bull markets peak when optimism is highest and the greatest number of investors are bullish; they also tend to peak when economists see no storm clouds on the horizon. With this in-mind, we consider the universal bullishness among economists and analysts to be a “warning flag” rather than a positive development. At this point, the odds are very high that the start of the next bear market could be upon us in the next 12-18 months.
In the past 80 years, every bear market except one (1956) has repossessed one-half or more of the previous bull market’s gain. Considering that the Dow Jones is near 18,000 and this bull market started at 6,547 on March 9th, 2009, that would mean the next bear market could easily see the Dow fall 6,000 points or more (35-40% loss). In addition, 5 of the past 15 bear markets have repossessed ALL of the prior bull market’s gain! The last thing we want to do is ride the market all the way down when this bull market comes to an end.
So what’s our strategy moving forward? At CWM, the main tenant of our investment philosophy is to limit losses by managing downside risk. We don’t believe in a ‘buy and hold’ strategy, but we also don’t believe it’s prudent to try and time the market. Since the data remains positive, we feel comfortable with our current allocation to start the year. However, if the data begins to shift, a more defensive stance will become warranted.
If you aren’t sure whether your portfolio is positioned properly for the current market environment based on the amount of risk that you’re comfortable with, please give us a call at 913.402.6099 to schedule your FREE “2nd Opinion” portfolio review.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit https://www.chladekwealth.com.