“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria”, said the late Sir John Templeton, the legendary value investor, laying out the four stages of a Bull market. As Bear Market return data gets expunged from mutual fund data, don’t be enamored with 10 year return data touted by many fund families. Rather, we believe it’s important to focus on data going back to the early 2000’s, which represents two full market cycles and can provide a better understand the risk/return characteristics of a fund in both Bull and Bear Markets. The Bull market that followed “The Great recession” is nearing its 10th Anniversary01. By the end of the 3rd quarter of 2018, we had market valuations stretched02 above historic averages by many market metrics, such as Price-to-Sales03, Shiller PE04 aka CAPE05 (cyclically-adjusted P/E ratio) and the Buffet indicator06.
Given this is the longest Bull Market in history; many investors had forgotten the perils of investing. This Bull has had periodic corrections from such things as the “Flash Crash” of 2010, the downgrading of US debt in 2011, the European debt crisis of 2012, the fiscal cliff debt battle at year-end 2012, the “Taper Tantrum” of 2013 when Ben Bernanke hinted about stimulus reduction, the 2014 Ebola scare, the “Flash Crash” of August 2015, the quick correction caused from BRexit in mid-2016 and the correction caused by the 1st actual FED rate hike at year-end 2016. Each of these events sent the markets reeling with corrections of varying depth and duration.
2017 was an exceptional year for many investors with a post-election rally that resulted in a relentless climb higher with the market frequently hitting new all-time highs. In fact, the S&P 50007, on a total return basis, had a historic “Perfect Year”08 with 12 consecutive monthly gains. As a finale for 2017, Republicans passed a sweeping tax overhaul09, commonly referred to as the “Tax Cut and Jobs Act”, with major changes to business taxation that extended the rally into 2018.
However, the mere mention of tariffs by President Trump in late January 2018 sent the market into the long awaited correction, which was coined the “Tariff tantrum”10. The correction was short-lived as investors once again began ignoring the rhetoric coming out of Washington. The Bull Market rally entered the 4th quarter with valuations stretched above historic averages by many market metrics as mentioned above. A handful of high-flying technology stocks that buoyed the market also fell out of favor, which hastened the decline. The October market ghouls took stocks from all-time highs into correction territorywith the S&P 50007 closing below its 200 day moving average11 and at the December lows being nearly in Bear Market territory.
2018 culminated with a “December to Remember” as the stock market was whipsawed by News-du-jour. On Dec 4th, President Trump referred to himself as “Tariff Man” 12 in a tweet, which initiated the December market swoon. The FED raised rates13 for the 9th time, which further exacerbated the decline. Defense Secretary Mattis abruptly resigned over the drawdown of troops from Syria and December ended with the political “Shutdown Showdown” of the Federal Government14. All of these events contributed to the recent market turmoil and the worst December market since the Great Depression15. However, market pullbacks can be healthy by reducing some of the frothiness and investor complacency in the market.
The Federal Reserve, commonly referred to as the FED, held interest rates near zero for what was an extraordinarily long time, which distorted16 normal asset pricing mechanisms. Easy money, which fueled the equity market, is now slowly coming to an end. The FED continues to raise rates in an attempt to normalize rates17 during a period of economic strength to have some future wriggle room. Also, the Fed continues to unwind its balance sheet by allowing roughly $50B of bonds to mature each month, which puts pressure on long-term yields and is comparable to quantitative tightening18. The markets rose after FED chairman Powell’s announcement that the FED will become data dependent and there is no preset path for 2019 interest rate hikes19.
Where markets go from here may very well be determined by exogenous events20. With the mid-term elections behind us21, investors can hopefully focus less on politics and more on fundamentals and seasonality22, which seem to look favorable for equity markets, especially if trade tensions subside. Caveat emptor as this Bull too will eventually succumb to a recession and Bear market as that’s part of the normal business cycle. In any event, we’re in the latter stages23of what has been a very long Bull market and caution is the watchword24.
If you have any concerns because of market volatility or the current Geopolitical environment, a member of the Iron Belt Partners Team will gladly discuss any concerns and schedule an appointment to meet if necessary. Our contact information is:
Lindsay M. Turchetta lturchetta@wradvisors.com (724) 493-9473
John D. Martin JDMartin@wradvisors.com (412) 925-7031
Working as a team in an effort to better serve our clients!
This communication is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. You should consult your tax, legal, and/or financial advisor prior to making any financial decisions. The views expressed here are those of the authors, John Martin & Lindsay Turchetta, and not necessarily those of LPL Financial. Information is based on data gathered from what are believed to be reliable sources. The opinions, and other information contained in this article are subject to change continually and without notice of any kind. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time and may not come to pass.
Investments are not guaranteed and are subject to investment risk including the possible loss of principal. Past performance is not indicative of future results. The S&P 500 is an unmanaged index which cannot be directly invested into.
01 Source: “Has the Bull Finally Entered Endgame” on USAtoday.com
02 Source: “Longest bull market in history is cracking as 'artificial support' fades” on CNBC.com by Stephanie Landsman
03 Source: “By one measure, stocks are as pricey as they were during the dotcom bubble” on CNBC.com by Fred Imbert
04 Source:“Shiller PE Ratio” on multpl.com/shiller-pe
05 Source:“Shiller PE - A Better Measurement of Market Valuation” on Gurufocus.com
06 Source:“Buffett Indicator - Where Are We with Market Valuations?” on Gurufocus.com
07 TheS&P 500 is an unmanaged index that cannot be directly invested into. Past performance does not guarantee future results.
08 Source: “S&P set to Break Record with Perfect Calendar Year” on ft.com by Nicole Bullock
09 Source: “How Tax Cuts and Jobs Act will affect you and your business” on Pilotonline.com by Stephen Korving
10 Source: “Trump's Tariff Tantrum Pushes Down Markets” on onenewspage.com by Wochit Business
11 Source: “S&P 500 drops below key level watched by traders” on CNBC.com by Thomas Franck
12 Source: “Trump, Self-styled ‘Tariff Man', Issues China a Warning" on nytimes.com by Alan Rappeport
13 Source: “Fed hikes rate, lowers 2019 projection to 2 increases” on cnbc.com by Jeff Cox
14 Source: “Shutdown showdown is first battle for Trump in new era” on cbsnews.com
15 Source: “Stock book their worst year since the financial crisis and worst December since the Great Depression” on Businessinsider.com by Jonathan Garber
16 Source: “How Interest Rate Hikes Will Trigger The Next Financial Crisis” on Forbes.com by Jesse Colombo
17Source: “The Fed hasn't 'gone crazy' and Trump shouldn't publicly diagnose” on CNBC.com by Saheli Roy Choudhury
18Source: “Fed bond unwind may be even less thrilling for Trump than rate hikes” on Reuters.com by Howard Schneider
19 Source: “Powell saysFED ‘will be patient’ on monetary policy” on cnbc.com by Jeff Cox
20 Source: “Bear or bull? Five reasons to claw or thunder” on Reuters.com by Lewis Krauskopf
21 Source: “Don’t sweat a stock-market selloff with midterms around the corner” on MarketWatch.com by Sue Chang
22 Source: “Why November Through April is the Best 6 Months to Invest” on money.usnews.com by Kira Brecht
23 Source: “Veteran Wall Street strategist sees Bull market nearing end” on cnbc.com by Michael Santoli
24 Source: “PIMCO says lack of fear in Markets Means you should be worried” on fa.mag.com by Adam Haigh