Bull Market Turns Eight Years Old by Jack Moller

Last week Donald Trump made his speech to Congress, more or less outlining his vision for the country.  For the most part, somewhat surprising to me, it was coherent, well-delivered and had something in there to appeal to many, many people.  Also, contrary to my fears that the market was running up to a speech that would disappoint and possibly be followed by selling, the market liked what it heard with Dow Industrials rising over 300 points the next day.

It’s starting to feel a bit more and more like the late 90’s, when stocks soared into the epic Internet bubble.  It’s definitely not on the same level as that, perhaps the biggest mania in history, but for the first time really since the March 2009 bottom the market feels a bit euphoric and giddy as prices keep trending higher.  Embedded in these soaring prices in the U.S. seems to be very high expectations that the Trump administration’s policies (those that actually get through Congress) will be very positive for the economy and markets.  Like many other market strategists whom I respect, it does feel like the risk is increasing for some type of disappointment leading to a very meaningful and likely scary sell off.  Yet, it seems like the more concern us smart guys have (tongue firmly planted in cheek), the stronger the market gets.  The key, though, is not to pretend to know if or when the selling will ensue but to be emotionally prepared so that we stay with our plans and don’t panic that the world is about to end as the press will be likely to broadcast.  In fact, personally I would welcome some selling to shake out some of the “weak longs” (as they call those who jump on the bandwagon late in the game) and moderate expectations so the euphoria will lessen.  Of course, what I do know about the market is that it is going to do what it does and not what “Jack wants”. 

I’d like to return to the 90’s analogy.  At that time, as it is now, the U.S. was the leading economy in the world, the dollar was strong, and the Federal Reserve had to deal with the dilemma – if they keep interest rates too low the economy would overheat and bubbles would (and did) continue to expand; on the other hand, if they raised rates they risked the dollar soaring further and significantly hurting U.S. exporters.  The situation today is not exactly the same, but as they say, perhaps history rhymes but does not repeat.  Today, we have very low unemployment levels, rising inflation (after years of deflation concerns), yet interest rates are still a stone’s throw away from the lowest levels in history, levels that would have been viewed as totally unfathomable not too many years ago.  Yet, the Janet Yellen-led Fed is further in a political box as the Trump administration is throwing blame at her/them for blowing up a bubble but also emphasizing a policy of helping the U.S. first.  If the Fed raises rates and the dollar keeps rising, the very same domestic exporting companies which Trump wants to help will be hurt by their prices becoming unaffordable outside of the U.S.

While that all sounds fairly ominous, there is one other thing to remember about the Internet bubble time period.  When it burst in 2000 leading to a long bear market, diversification was found to help mightily.  While the large U.S. stocks which had outdistanced most other markets in the run-up got hammered, many other markets weathered the decline much less painfully.  Although the tech-heavy NASDAQ plummeted nearly 80%, diversified portfolios limited the drawdown to a more (emotionally and financially) tenable 15%-20%.  I well remember the late 90s, in particular 1998, when the S&P 500 was doing so much better than everything else.  It was quite challenging as an advisor to keep clients from overloading large domestic companies.  In the end, I believe they were very happy indeed that they maintained the diversification, limited the decline in the bear market, and were able to continue to follow their financial plans. 

Again, we are in the midst of the second-longest bull market in history (will be eight years on March 9) led by the U.S. stocks market.  The keys to successful investing continue to be to maintain the discipline of following our plans/strategies, especially when it gets difficult to do so.  One way to help with this challenge is to be emotionally prepared for the next bear market and not to forget that it too will end and be followed by another bull market.