What Is Happening In The Market

If you have looked at your 401k account statement recently, you probably have been pretty happy. The Market has been up almost all year. It is fun to see the accounts go up, but not so much fun when they go down. The problem is, markets go up and down. Predominantly, they go up, but it is NOT a straight line. Markets do go down as evidence by the Bear and Bull chart in this article.

Many of the pundits have said recently investors should prepare for the coming downturn. If you think of this prediction like a coin flip, if you call heads every time, you are bound to be right once in a while. The same is true with market prognostication. If you say the “sky is falling” enough times, you might eventually be right. The same is even more true of down markets. There are analysts who are always doom and gloom, but if you look at the Bear and Bull chart, you can see how dominant the Bull markets have been historically.

So who is right? First, everyone needs to understand markets are random and unpredictable. This means no one is going to be able to accurately predict market movement correctly, all of the time. So be prepared to be surprised. There were very few who could have predicted the Tech Bubble burst in 2001 or the Credit Bubble burst in 2008.

As an investor, what should you do? Look at this chart. It shows the Bear and Bull markets since 1926. As you can see the Bulls are much more prevalent than the Bears. That does not mean there is not pain when the market falls. But historically, the only ones who lose money are the investors who sell in a panic. They sell at the wrong time and then don’t know when to get back in, so they miss out on most of the upturn. Trying to time the market is a loser’s game.

Warren Buffet, perhaps the greatest stock investor of the last 100 years, says to invest successfully, you don’t have to be the smartest person in the room. You don’t have to be a business wizard and you certainly don’t have to cheat using insider information. You only need two things.

First, you need to have an intellectual framework for making good, long term investment choices. But equally, or more important, Buffet says you need an emotional guardrail around your framework to keep you from destroying your investment portfolio when things get tough. Buffet is a long term, buy and hold investors. He is saying, don’t let your emotions dictate your strategy. Pick a strategy and then stick to it.

There is another interesting perspective to consider in this chart. Notice the length of time the Bull markets last. They are 13.9 years, 15.1 years from 1932-1960. Then there are two starts and stops – one lasted 6.4 years and was interrupted by a downturn of 1.6 years. The next Bull was a bust, it only lasted 2.5 years with a bear that lasted 1.8 years. But then you had a long run of 12.9 years, a slight downturn and then another 12.8 years.

That brought us right up to the Tech Bubble and then 5.1 years later, the Credit bust. But notice that downturn, one of the worst in history, only lasted 1.3 years and now we have been in an upswing for over 7 years. So please guess with me – do you think the 7.8 years will suddenly become a Bear market, have a downturn> Or do you think it will run another 5 years like many of the other Bull markets have in the past?

Regardless of your political proclivities, the proposed tax reform and many instances of deregulation have driven consumer confidence to a 13 year high. Is it likely the markets will continue to respond favorably to this shift in policy? Will capitalism drive the markets higher? Or lower?

In the next article, we will look at inflation and the effect it has had on the markets. We will also look at the submarkets and see what we can glean from them. Every market is full of submarkets. If we can understand how they work, we can use that knowledge to build a long term portfolio that has the highest probability of delivering a long term return with a minimum amount of risk.

In the next article, we will look closely at the submarkets and talk about how to build portfolio on an intellectual framework.


Guy Baker
Founder & Managing Director