We are in the fifth inning of a nine inning long-term secular bull market in stocks comparable to the 1982-1999 bull market. So declared Joseph Zidle, Portfolio Strategist for Richard Bernstein Advisors, LLC, speaking June 7, 2014, to a gathering of financial services professionals at a meeting sponsored by the clearing and custodial giant, Pershing.
Zidle’s upbeat forecast may surprise investors, many of whom remain wary and cautious. Domestic U.S. equities recently showed outflows to safer havens in bonds and money market funds. It is that very caution that bolsters the case for optimism.
Is Zidle’s fifth inning baseball analogy suggesting that we are halfway through a 9-inning bull market stretch? No. Innings are not time constrained—they may be shorter or longer. Baseball fans will relate. The longest major league game on record was a 1920 contest between the Brooklyn Robins (Dodgers) and the Boston Braves. The 1 to 1 game was called after 26 innings due to darkness. Conversely, the shortest game in baseball history was a 9-inning 1926 New York Giants 6-1 victory over the Philadelphia Phillies in 51 minutes. Zidle’s point: We are in the early stages of a big secular bull market!
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Nevertheless, we will have pullbacks. Within a secular bull market, periodic dips between 5% and 10% are common. A 20% drop from a previous high point may produce a “bear interlude” within a long term uptrend. In a 1/22/2013 USA Today story, Kevin Pleines, equity analyst at Birinyi Associates, indicated that a long stretch without a major correction does not suggest that one is imminent. Said he, “Looking at the history of the market, there has been no consistent point or metric during bull markets that indicate that the market is 'due' for a correction.”
Since 1932 corrections have occurred on average every 2.5 years. The average price drop since 1962 is 13.5%. Investors still suffer from “recency bias,” anxiety as to how the stock market behaves based on recent experience, primarily the crash of 2008-2009 when the S&P 500 index dropped by almost 50%.
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We live in a world of uncertainty with a 24/7 news cycle. Zidle observes, if you constantly watch Crisis News Network with “breaking news” accompanied by ominous music, pessimism will color your view of the future. Dour forecasts are legion. In a commercial touting gold as an investment, Swiss advisor Marc Faber opines, “We are in a gigantic financial asset bubble. It could burst any day.”
Volatility is a fact. However, there is “upside” and “downside volatility.” You need to plan on both as a portfolio is tailored to your risk tolerance, goals, time frames, and temperament.
Per Zidle, only one or more of three things end a bull market: an inverted yield curve, extreme overvaluation, and unbridled euphoria. None are in evidence currently.
A “yield curve” is a line plotting interest rates of bonds of equal credit quality over short- to long-term maturity dates. The Treasury yield curve charts yields for U.S. Treasury paper from one month to 30 years. For 6/13/14, the curve shows one month paper yielding 0.04%; 2-year, 0.45%; 10-year, 2.60%; 30-year, 3.41%. The curve, says Zidle, is not inverted, but “historically steep.”
Today we have a steep but “normal yield curve,” in which longer maturity bonds have higher yields than shorter maturity bonds due to risks associated with time, such as inflation. An inverted yield curve, where short-term yields are higher than long term yields, often is taken as a sign of impending recession.
We are not looking at extreme valuations in the market. There are differing models, all debatable. However, Zidle emphasizes that markets cannot be overvalued when people are uncertain and cautious. Uncertainty equals undervaluation; overconfidence equals overvaluation. At times we may see euphoria in single stocks like Telsa or selected internet plays, but currently, not across the board.
In short, given chaos in the Middle East, Ukraine, and elsewhere, with rising oil prices, a short-term retrenchment will not surprise. In our next column we will detail Zidle’s thinking as to an “American industrial renaissance” as a case for equities.
Walker Capital Management, LLC, Lewis Walker is President of Walker Capital Management, LLC. Certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with Walker Capital Management, LLC. lewisw@theinvestmentcoach.com
