Do Trees Grow to the Sky?
“Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.” -Bernard Baruch
The most common question we’ve been asked recently has been “is it too late to be putting money into the market?” After all, this bull market is in its 96th month and is the fourth biggest since 1928, gaining over 250% since the March, 2009 bottom. Yes, it’s frustrating to think about missing the 10%+ move since the election, especially if you’ve been waiting for a correction. Should one sit on the sidelines and wait for the inevitable pullback, or will the market run up another 10% before that happens?
By now, most of our readers know that we believe timing the market is a fool’s errand. Markets frequently act in ways investors don’t expect. The key to successful investing is to focus on the facts and don’t rely on predictions and forecasts. How many experts accurately predicted Brexit, the US presidential election result, or even Leicester City winning the Premier League? Our investment philosophy relies on what we know, not on what we think we know.
What we know is that the US stock market has averaged an annual rate of return of 8.38% for the 20-year period between 1996 and 2015 which included such dramatic and volatile periods as the dot-com bust and the subprime mortgage crisis. If you tried to time the market at any point in that 20-year period and missed only the top 10 best performing days, your annual return would have dropped to 4.91% (source: Morningstar/Legg Mason, 2016). Staying in the market is a better long-term strategy than trying to predict the market.
We also know that most of the conditions that usually signal the aging of a bull market are simply not present right now. For example, the small investor usually piles into the late stages of a bull market. To date, that has not happened as evidenced by mutual fund flow data. Since the market bottom in 2009, there have been $1.5 trillion of bond mutual fund inflows while US stock funds have seen $160 billion of outflows. An increase in mergers and acquisitions and IPOs are also reliable markers of the later stages of long-term bull, but activity in those areas has been subdued (according to Renaissance Capital, the 2016 IPO market hit a 7-year low).
But we also know that interest rates are beginning to move higher again after an extended and distorted period of what has become known as “financial repression,” (i.e., a period of extraordinarily low interest rates intended to stimulate borrowing and economic activity but with the insidious side-effect of penalizing savers.) We are now entering what appears to be a more normalized business cycle where we transition from an economy driven by monetary policy to what Washington promises will be a robust fiscal policy hopefully resulting in higher business spending, more jobs, and a continued economic expansion.
So we appear to be moving from a period of uncertainty to a period of positive uncertainty. With one party controlling the White House and all of Congress, the outlook for regulatory and tax reform holds more than a glimmer of hope (although their recent attempt to repeal and replace the ACA wasn’t a resounding fulfillment of this hope). One thing appears certain: Washington will do whatever it can to champion a pro-business agenda over the coming year. This is rarely bad for markets.
So this brings us back to the original question of whether or not trees can grow to the sky. The simple answer is found in our decades of battle-scarred experience and the resulting wisdom: the market pendulum always swings too far to one side before reversing course. We don’t think we’ve yet seen the excesses consistent with the end of previous bull markets, and the market has already weathered an earnings recession in 2015-2016. What we do know is that our primary job is to control risk for our clients. We will continue to monitor the hard global data, the political environment, and other factors that could signal the pendulum nearing the end of its trajectory.
We will do this by continuing to stay globally diversified, holding an appropriate mix of US and foreign stocks, bonds, and other assets that will give our clients the best chances of preserving and growing their portfolios over time.
ClearRock continues to seek alternative sources of value for our clients. One such strategy is represented by the launch of our new Policy Opportunity Portfolio (“POP”), an “enhanced index” approach to investing in the market through a unique strategy seeking to capitalize on the US companies who successfully and most intensely lobby Congress. For more information, please contact us.
As always, we appreciate the confidence you have placed in us and will continue to earn your trust every day. We welcome your comments and questions.
-The ClearRock Team
Disclosure: This material is based on information from a variety of sources we consider reliable, but we do not represent that the information is accurate or complete. The material provided herein is for informational purposes only. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this document, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from ClearRock LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request. ClearRock does not provide tax advice to its clients. All investors are strongly urged to consult with their tax advisors regarding any potential investment.