March Commentary: I Have Seen the Market Top

If you have been a client for any measurable amount of time, you have probably heard me say something to the effect of, "we don't know when it is going to be, but we have now been in a bull market for several years, so there is no question that we are due for a market correction sooner rather than later." Sound familiar? It should...because I feel like I have said it about 1,000 times in most client meetings since 2013.

I haven't gone out on this limb in hopes of timing the next market correction—God knows that if we have learned anything over the past few months, it is that prognostication of any kind is really a losing game. The truth is, we are now more than 8 years into a bull market, making this the second longest bull market in U.S. history, with cumulative returns (as measured by the S&P500) of more than 348% over more than 2,900 days.

The bottom line is that we are in somewhat uncharted territory. Over the past 85 years, there have only been five bull markets (not including the one we are in right now) that have even lasted five years. Fewer (three to be exact) that have lasted six years. It is no wonder that financial advisors and money managers alike have been scratching their heads a bit.

And then there is the "Trump rally". To be fair, presidents, any presidents, should only get a small portion of the credit or blame for market returns. That said, the market response to our most recent presidential election is undeniable. Since markets opened on November 9th, the S&P 500 is up almost 12%. That is not nothing, and is largely attributable to the perceived influx of deregulation and tax reform.

So are we at the top? A good guide for this is a MarketWatch article entitled "7 Signs We're Near a Market Top and What To Do Now". A few of the reasons that MarketWatch outlines include the following:

 

1. Retail investors start pouring into stock funds in fear of missing out on another year. CHECK. Through February, $124 billion had flown into ETFs in 2017, the fastest start to any year in the history of the ETF industry.
    
2. The NASDAQ (tech stocks) begins to run up. CHECK. Over the past 13 months, the NASDAQ is up more than 37%, outpacing the S&P 500 (28%) and the Dow Jones (30%) during the same period.
    
3. Fear and greed are taking over. CHECK. Investors, afraid of missing what is left of the bull market, have moved into what MarketWatch calls "ATM" buying (anything that moves).
    
4. The Investor's Intelligence Survey is concerning. CHECK. This closely watched survey of professional investors shows a low proportion of bear market sentiment, just as it did in 2007.

 

"So what you are saying, Ari, is that we are at the market top and it is time to hide our money under the mattress, right?"

That might be what you are thinking after reading some of this. However, there is one catch. The article that I referenced—you know, the one that lays out the signs of the market top—it was published on March 7, 2014. And if you had listened the first time these signs were published, you would have missed out on almost 27% of market gains over the past two years.

It is impossible for anyone to know for certain where the market top is. Experts were sure that after 2013, a year when the S&P500 returned 23%, but then the S&P500 returned 12.3% in 2014, took a one year break in 2015, and returned another almost 17% this past year. And if the first 11 weeks of 2017 are any indication (and it's possible they are not), then we are not slowing down any time soon.

As I said at the outset, prognostication is a losing game. But how can we deny the likelihood that the treads are getting tired on this bull market? Understanding that in a down market, everybody loses to some extent, there are a couple of ways to protect yourself from the next correction, no matter when that might be.

• Cash is King. You should always keep 6-12 months' worth of expenses accessible in a savings account. And in a downturn, it should be your first stop for extra funds if needed.
   
• Stay Diversified. Downturns are better examples of why you should always maintain a diversified portfolio than any other market condition. When the market goes down 20% or 30%, or nearly 40% as it did in 2008, having maintained a portion of your investments in fixed income (bonds) and cash will help offset negative results. Remember, the global market doesn't just decide to take a dive all at once, so being diversified is critical.
   
• Don't panic. The WORST time to sell investments is when they are going down. Downturns are short-term events. Even the Great Recession, the black swan event of our lifetime, lasted less than 18 months. If you have cash (as above) and are diversified (as above) then when it comes, the best thing you can do is simply ride it out.
   
• Don't chase. In the same way you shouldn't sell investments when they are going down, you shouldn't buy investments because they have gone up. Chasing returns (good or bad) is a surefire way to see results that you don't like. It is the primary reason why the average investor sees returns that are less than 30% of what the index should provide them with.

I have no doubt that 2017 is not done with its fair share of surprises. That said, if you prepare properly, pay attention to facts instead of fiction, to policy instead of rhetoric, you will position yourself well for all markets, and hopefully, do so while leaving the blood pressure medication on the shelf.

 

Sources
http://seekingalpha.com/article/3987722-2nd-longest-bull-market-history
http://dollarcollapse.com/stock-prices/second-dumbest-kind-money-pouring-stocks/
http://www.cnbc.com/id/42459309
http://www.investorsintelligence.com/x/us_stocks.html
http://www.marketwatch.com/story/7-signs-were-near-a-market-top-and-what-to-do-now-2014-03-07