Happy Bull Market Birthday! The current bull market just turned 6 years old, which was born on March 9th, 2009 when the Dow Jones Industrial Average was at 6547. While birthdays are typically reason for celebration, they can also be unnerving for those that don’t like the idea of getting older. While bull markets don’t end solely from old age alone, we can’t help but get nervous about this bull market’s outlook over the next year. The following paragraphs will discuss some of the reasons for our cautious stance moving forward.
As mentioned in past market commentaries, margin debt (the amount of money borrowed to buy stocks on margin) is an important gauge of excess; and excesses always develop in an aging bull market. Margin debt peaked in February 2014, and continues to fall into 2015. This fall in margin debt indicates that speculators and traders are starting to unwind their leveraged positions. If the margin debt level is able to recover to new highs, and has truly peaked for this market cycle, it becomes more likely that a bear market is not far off.
Another reason for concern is the number of “Boom!” headlines and high level of advisor optimism. As measured by the Advisors Sentiment Survey, the current % of bearish advisors is 14.1%. Aside from one week last September when the reading was 13.3%, this is the fewest percent of “bears” since 1987, shortly before the infamous Crash. This type of optimism hasn’t been a reliable indicator for market crashes, but it has consistently shown itself in the latter stages of a bull market.
Our final reason for being cautious is that corporate profits have peaked. Corporate profits usually peak or level off ahead of reported S&P 500 earnings and can provide an early warning flag for both earnings and the market. While companies continue to report earnings increases, corporate profits peaked over a year ago. Just because profits have peaked doesn’t necessarily mean we are headed into the next bear market (recession), but it definitely makes us wonder if we haven’t already entered the final year of this bull market.
While the above evidence can certainly make investors nervous, it’s also important not to try and time the market. It’s unlikely that the next bear market will start until “warning flags” appear. We continue to look for the technical and fundamental warning flags that have historically presented themselves 6-9 months in advance of a bear market, and at this time there are still none to speak of. However, we have started to take some defensive measures within our clients’ portfolios in light of the facts above, and will not hesitate to increase our cash positions when these warning flags start to appear.
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.