Dear, clients -
A few weeks ago, the U.S. stock market rally (that officially began March 9, 2009 when the market bottomed from the Credit Crisis) became one of the longest on record. By record, it is one of the longest periods in history where the market has avoided falling by 20% (officially known as a "bear market". A "correction" is a fall of at least 10% - here is a link for related market terms, in case you are interested.) We've had a number of corrections, but they have proven relatively short-lived during this period.
In other words, it's been nearly a decade of steady, double-digit annual stock market returns. We definitely prefer making money, versus losing it. :-) Over that period, we've sent notes when the markets have been especially volatile and recommended that our clients stay the course and remain invested in stocks. That occurred in late 2008/early 2009 (back when I was just breaking out on my own as an advisor), late 2011 when banking stocks plummeted again, and late 2015/early 2016 when oil prices plummeted to below $40 per barrel. By no means are we claiming to have called any market bottoms, but we have definitely been able to remain relatively level-headed, such as when the market fell 10.5% in January 2016. That fall did result in having to drop teaching ungrateful undergrads (well, not all of them) to focus fully on the markets and my business, but all portfolios recovered from that one as well.
The market remains strong, and the S&P 500 (the 500 largest companies based in the U.S. - our primary proxy for stock market performance) has returned nearly +10% so far in 2018. Again, we don't believe we have any ability (we think anyone that claims to is confusing luck for skill) to call market tops or bottoms, but we think it's reasonable to conclude that we are in the latter stages (maybe the 7th or 8th inning of a 9 inning bull run) of an upswing in the business cycle. No one really knows how much farther the market can increase, or the boom in the economy continues, but at some point a recession is inevitable.
Attached are a couple of interesting articles that muse on where we might be in the market cycle. The first, from a Wall Street Journal article today, insightfully details:
"If we knew the cycle would end soon, investing would be easy: Dump stocks for bonds. But the final phase can sometimes last for years, during which rising yields hit bond prices while stocks typically do very well. Investors who decide the end is near but they will hang on for a final few months of gains from stocks should remember how bad things can get in a recession even when the banks are fine, however: The S&P 500 lost more than 30% from peak to trough in the 1970, 1974 and 2001 recessions."
In other words, even though you might have an inkling that this rally will soon run out of steam, it could go for another year or two, or longer. But when a recession does arrive, stocks could take a (what we would think would be a near-term) tumble of as much as 30%. In extreme cases, such as the financial crisis, stocks could swoon 50%.
The second article, from Fortune magazine, pulls no punches in suggesting that "The End is Near For the Economic Boom". Yet it similarly points out that:
"FROTHY STOCKS, economic indicators pointing down, financial stability flashing red, trade war, and more—it’s a lot to worry about. It doesn’t necessarily mean calamity is just ahead. For all we know, stocks could resume rising or even “melt up,” as Grantham says. The economy may well grow impressively this year. But we don’t have to look much further out to get more nervous. No one except the Council of Economic Advisers seems to think GDP can grow at 3% over the long term, and if the recent stimulus turbocharges growth, it does so at a price that will have to be paid afterward. The economic cycle hasn’t been abolished; all evidence says we’re in the latter stages of one. And we had better be ready for the next recession, because when it arrives, economists will not have predicted it."
Our main goal for sending this email isn't to scare you out of stocks, but rather to consider taking some 'chips off the table' (i.e. reducing your exposure to stocks by either holding more cash, adding more bonds to your asset allocation) if you worry about your portfolios going down in value. In other words, it is our first overall note of caution that the smooth sailing we've had the past 10 years won't continue indefinitely.
We would like to ask you to ask yourself how you might feel if you woke up Monday and the stated value of your stock portfolio was 20%-30% lower. Would you be upset? Well, of course you would, but could you see it as a temporary setback? We wouldn't be upset at all (well, maybe a little!) because we believe that stocks will reach new highs in the next bull market, whenever that might be. But I'm also only 43 and have plenty of time to ride out a downturn. If you think you would be overly upset by a market dip, let's discuss.
Our conclusion/recommendations is, if you invest in stocks, try to keep an investment horizon of five to 10 years. In other words, consider it money you won't need to spend any time soon. The market has never NOT recovered from a downturn. 2008 was the closest we've ever gotten to that point, and a decade later it's as if it never happened (in fact, it was what will likely be the best buying opportunities in our lifetimes).
We'll continue to talk with you all individually on this subject, but please don't hesitate to contact us if you would like to talk further. As a last point, we believe we are being as conservative as we can in stocks, investing a lot in healthcare and consumer staples (food, consumer goods) companies that should do fine in a downturn. We don't have a lot of concern that dividends will be cut, so the income your portfolios generate should be relatively safe. At least that is our hope! Bonds are benefiting from rising rates - we can earn you 3% to 4% in bonds with maturities of less than five years. That's also the first time since the Great Recession. And you get your money back at maturity. That isn't necessarily the case in bond funds.
Thanks for your time - please don't hesitate to let us know if you have any questions!
Ryan & Steve