Insurance is designed to protect assets in case something bad happens, but you must have the policy in place before the trouble starts or else the policy is worthless. The same rule applies to investing. A strategy to protect your investments in a bear market only works if you have that strategy in place before the bear market starts. No one knows exactly when the next bear market will begin, but there is a lot of talk in the media about the current bull market coming to an end. Just google “end of the current bull market” and you get 8,230,000 results with headlines like:
“Prepare Now for the End of the Bull Market” – Bloomberg
“Warning Signs Bull Market in Stocks Coming to an end” – Business Insider
“Will This Mark the End of the Bull Market” – Seeking Alpha
“Happy Birthday, Bull Market! It May Be Your Last” – Fortune
“Santoli: 2017 Could be the Bull Market’s Bi Finale” – CNBC
An article published in the New York Times on March 31st reads, “The market’s facing its most substantial challenge in some time,” said Eugene E. Peroni Jr., the director of technical research at Janney Montgomery Scott. “We’re seeing an abrupt shift in market psychology. Investors are beginning to question the bull market’s underpinnings, such as interest rates, liquidity and earning prospects.” That statement sounds like a reasonable viewpoint on today’s current market, and there are reasons to be concerned that the bull market might be coming to an end. Just look at a measurement like the Shiller CAPE Index. The Shiller index measures the level of the S&P 500 relative to the average inflation-adjusted earnings from the previous 10 years. The historical average is around 16-17, and the market trades around 30 at the time of this writing. That’s expensive in relative terms. If you expect stock markets to revert to the mean, it would make sense to get out of stocks now since they are so expensive, right?
Here’s the problem, that article was written on March 31, 1997. The CAPE ratio was roughly at the same level when the article was printed as it is today. The market rose for another three years after that article was written. You would have missed out on a gain of about 80% before hitting the bull market top if you had sold out in March 1997. This doesn’t mean that today’s market is going to rise for three more years or that you will see another 80% gain in the S&P 500 before the market tops. The point is that market tops are incredibly difficult to predict.
So, the question isn’t when will the bull market end, the question is what is your plan for when it does end? Greg Morris, retired money manager and current blogger at StockCharts, puts it best when he asks, “If you recall, the 2000-2002 bear eventually dropped 50.0%. If you are not a trend follower, I have this question: At what stage did you get out of the market? Was it based on portfolio drawdown, stops, fear, all of the above? You need to think this through now; not during the topping process.”
Do you have a plan for the next bear market? Waiting until this bull market ends is not the best time to start working on a plan. MSCM has a plan for the next bear market. Contact us at www.mscm.net or 214-922-9200 and we will tell you about it.