With a long holiday weekend upon us and just four months left in the year, we thought it might be a good time to take a step back from the blinking screens and do a thorough checkup of the really big picture. In short, we want to summarize where we stand on the macro issues, the economy, what we expect to see next, and our current general investment strategy. And since this represents an awful lot a lot of ground to cover, let's get right to it.
Our Macro Themes
Before we get started, let me say that some of this will sound familiar as we have discussed many of the issues in prior reports. However our goal here is to create one succinct report to let you know where we stand. First, let's look at our macro themes.
There are five major themes in our macro view of the stock market at the present time:
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Current Secular Trend: Bear Market in U.S. Stocks
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Current Rally is a "Mini Bull"
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U.S. Recession Ending
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Go Global
- Manage Risk at All Times
Secular Bear Market in U.S.: We've touched on this topic several times in the past, but to review, a secular bear market is a multi-year (think 10 years or longer) period of negative returns in a market. Unfortunately, most investors have never heard of this concept, let alone experienced it, as the last secular bear market in the U.S. stock market ended in 1982. The exact starting points of such market cycles usually require a healthy dose of hindsight. Examples of prior secular bear market periods in the U.S. (as defined by Ned Davis Research) include: 1966 – 1982, 1929 – 1942, and 1906 – 1921. And for a more recent example, one needs look no further than the Japanese stock market since 1989.
Some analysts argue that the current secular bear in U.S. stocks began in 2000 while others point to the 2007 top as the starting point. The charts of the S&P and NASDAQ make both arguments fairly well. We'll agree that the secular bear in the NASDAQ definitely started in 2000. However, we can see both sides of the argument in the S&P 500.
S&P 500 - Monthly Prices:
NASDAQ Composite - Monthly Prices:
If the charts don't convince you, perhaps a quick review of the total returns for the S&P, NASDAQ, and the Lipper Growth Fund index will. Below are the cumulative returns of each index since the new millennium began (S&P and NASDAQ results employ price only index returns):
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No, that's not a mistake. If you had plunked $100,000 into the Lipper Large Cap Growth Fund Index on New Year's Eve 1999, you're account value would be something on the order of $57,690 as of the end of August. And for those tech aficionados out there, you will still need to see the NASDAQ run up +151.27% from Friday's close to get back to the 2000 high of 5048. In short, THIS is what a secular bear is all about.
The mutual fund industry would have you believe that you should invest for the long term and "stay the course" through thick and thin. However, we're going to suggest that 9.5 years IS long-term. And since investors are still sitting with a fairly large loss over that period, it might be a good idea to admit that the concept of buy-and-hold is something best suited for secular bull markets.
It is our opinion that when you find yourself in a secular bear you need to change horses. Forget buy-and-hold and instead, consider implementing a buy-and-sell approach. In addition, it is vital for investors to understand that you MUST manage risk. Remember, there is no law that states you need to remain fully invested during bear markets. Thus, we'll suggest that investors may want to have an exit strategy at all times during a secular bear market environment.
However, don't despair because although this is a secular bear, there ARE great opportunities for profit available. It's just that this type of environment requires a different approach than blindly buying and hoping for price appreciation.
It's a Mini Bull: Speaking of profit opportunities, we've also spent a fair amount of time in our weekend State of the
