It was Friday, March 6, 2009, and the stock market was in the midst of a six-month freefall. In the last six months, the Fed had stepped in and bailed out the banking system with the TARP program, Bear Stearns had been bailed out, the government salvaged Freddie Mac and Fannie Mae who guaranteed over half of the nation’s mortgages, and Lehman Brothers, the fourth largest investment bank in the United States, declared bankruptcy. That day the Dow Jones and S&P 500 hit 12-year lows on the heels of an extremely bleak February Jobs report which signaled 4.5 million jobs had been lost to that point. But something strange happened that afternoon. The stock market clawed its way back in the last hour of trading to the point where the Dow finished up 0.4%, and the S&P 500 ended up 0.1% on the day. There were no bells or whistles to suggest this was the sign of more rosy things to come, but we know now the Great Recession would hit an absolute market low on Monday, March 9^th.

This month marks the 8-year anniversary of the current bull market since that time. As we sit here in March 2017, many investors are now wondering, “When will this market run come to an end?” This article will look at the past bull and bear markets and argue that no one really knows the true answer to this question.

A Historical Look at Bull & Bear Markets

With the recent run in the equity markets since the Presidential election in November 2016, there has been a sense of pessimism from many camps that this market run has seen its day and there will be a big correction in the very near future. “How much longer will this bull market last?” When asked this question by clients, our answer remains, “Nobody knows for sure.” Even though each market cycle is different by definition, we can examine past bull and bear market cycles to observe particular patterns.

Since 1903, there have been 12 bull markets and 6 that have lasted longer than the current run. Additionally, 5 of those market runs have been much steeper than the current climb of about 250%. Bull markets, in general, tend to be longer and more pronounced, whereas bear markets tend to be much shorter in length and less pronounced in depth. One metric to look at is where current markets are valued in relation to price. Due to the recent run in the equity markets, the Price/Earnings ratio of the S&P 500 is what we would call on the high side of historical averages, but it is not out of line and certainly nowhere remotely near levels seen in the late 1990s at the end of the tech boom. With job reports being positive and strong corporate earnings also purveying, this market could conceivably continue to run for a while longer.

This Bull Ride Has Been Bumpy

Making emotional moves about short-term movements in the market is speculating, not investing. During the current 8-year bull market run, there have been many geopolitical and economic events leading people to think that might be an appropriate time to sell equities. These events, which have been sources of investor uneasiness, include the Flash Crash, European Debt Crisis of 2011, Fiscal Cliff, Ebola virus, Chinese stock crash in the summer of 2015, the worst January in history for the S&P 500 index in 2016, Brexit, and most recently the US presidential election. Typically the media overreacts to these events and their correlation to long-term stock market performance, which gives people reason to believe this will lead to the end of the current stock market run or cause global market slowdowns. The point being made is if you had listened to the “experts” or “talking heads” during these events, you would have likely acted emotionally and missed a good portion of a healthy equity market over the last 8 years.

Three Things You Can Control

Instead of speculating on when the next pullback will be, we preach that investors can do things to mitigate certain risk that is inherent with exposure to the stock market. At the top of this list is broad diversification. Owning thousands of different companies of different sizes around the world is one of the only free lunches in investing. Different asset class sectors and industries move differently in different market environments, and owning some of each can help minimize the overall volatility of a portfolio versus trying to pick a handful of stocks or continually bouncing in and out of the market.

Secondly, understanding your own particular needs will go a long way in helping mitigate some risk. We preach that it is critically important to develop a game plan for saving and clearly define goals or spending needs before entering retirement. This exercise can ensure your asset allocation (%stocks/%bonds) is aligned accordingly to avoid subjecting your nest egg to additional, unnecessary risk. We encourage people who are entering retirement to have anywhere from at least 7-10 years’ worth of shortfall expenses in safe, conservative fixed income to weather market downturns or short-term volatility.

Lastly, it is important to remove emotion from the investing process. This can be done by implementing a disciplined trading strategy that uses mathematical formulas and not human emotion to systematically rebalance a portfolio. A strategy employed by Lutz Financial sells asset classes that have performed well relative to the rest of the portfolio and subsequently purchases asset classes that have decreased or lagged behind the overall portfolio on a relative basis. This is one of the harder things to do in investing because it is often counterintuitive or goes against conventional wisdom.

Why play the guessing game?

We do know this bull market will end with a correction at some point. Will that be in 6 years or 6 days? You don’t have to have some magic crystal ball to predict when this will happen to have the successful investment experience that a diversified portfolio will hopefully allow. You can weather the short-term downturns of the market that are certain to occur by maintaining a long-term, disciplined investment philosophy and allowing yourself enough intermediate-term sources of liquidity to avoid having to sell equities at the wrong time. If you have any questions, please contact us.

IMPORTANT DISCLOSURE INFORMATION