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We often visualize the stock market as a graph line, moving (hopefully) upward in a saw tooth pattern. But it might be more useful to view the market as a rolling series of cycles — some big, some small.
Over the past hundred years, the stock market has passed through a series of clearly defined long-term bull and bear cycles, each lasting for several years. The longest bull cycle, for example, lasted 24 years. But within each bull cycle, there are frequently shorter bear cycles lasting, say, 12-18 months. Conversely, the long-term bear cycles are routinely interrupted by short-term bull cycles.
Recognizing these “mighty” and “mini” cycles can help you get in position for the best chance at gains. So, where is the market right now? We are currently 7.5 years into a mighty bull cycle and enjoying a mini bull cycle as well, according to the market research firm NDR. This double-bull cycle scenario typically generates the strongest stock market returns, generating an average of 107 percent gain over 753 days.
More importantly, there is good reason to think the current mighty bull will last for several more years. Among these:
Stock valuations are between the ditches. Investors are paying little or no premium on the earnings per share of most stocks. This indicates we aren't in a bubble. Similarly, people are not overinvested in stocks. The ratio of stocks/bonds as a percentage of household assets is well below the levels seen at the peak of previous mighty bull cycles.
Decent economic growth outlook. This will boost corporate earnings and reduce fears about deflation, which can drive investors into bonds and other assets.
Stocks are cheap compared to bonds. Globally stocks are yielding an average 4 percent more than government bonds, some of which are yielding 1 percent or less.
Room for higher oil prices and inflation. Rising energy costs have traditionally been a drag on the economy. But oil's current steady rebound from historically low prices actually indicates that the world economy is improving, which will drive stock prices up. Similarly, while inflation is usually a bad thing, some increase in prices would be welcome at this point as a sign of growth.
CHIME is strong. I like to judge the structural health of the economy by a bundle of measures we call CHIME. For the most part, these indicators remain positive:
- Consumer spending — Trending up 4 percent during second quarter.
- Housing — Existing home sales are at their highest level in more than nine years.
- Interest rates — Money remains cheap and the Federal Reserve seems likely to maintain a go-slow policy on rate hikes. But even if they do start to move off the current historically low rates, they would have to go significantly higher before they impacted stock prices.
- Manufacturing — This trend has turned toward expansion and is well above where we began 2016.
- Employment — Hiring was up modestly in July, jobless claims remain low and unemployment is at a tolerable 4.9 percent.
How long will the mighty bull continue to rule the market? Through this decade, and maybe until 2021, according to NDR’s researchers and analysts. Again, that’s not to say we won’t experience a mini bear cycle (or two or three) in the coming years. These would most likely be caused by a recession.
It can be painful to open your brokerage statements during any bear cycle, no doubt. During the mini bear of 2011, stocks dropped 17 percent. They were off 15 percent during the mini bear that began in 2015 and lasted into early this year.
But if you are able to recognize such downturns for what they are — short-term setbacks, not the apocalypse — you can make smarter investment decisions. You won’t be tempted to jump out of the market, thus forfeiting potential future growth in that quality portfolio of yours. You might even go looking for bear-cycle bargains. (Bear hunting?)
As with most things in life, when it comes to investing, it’s the big picture that ultimately matters. Learn to see it, and you’ll benefit mightily.
Wes Moss has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than seven years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.
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