Investment Strategies

Clients fret as bull market reaches 8th birthday

High values, long life raise investor eyebrows

Mar 6, 2017 @ 4:46 pm

By John Waggoner

The bull market has reached its 8th birthday, and advisers are starting to tell their clients to tone down their expectations for the next few years.

The Standard & Poor's 500 stock index hit bottom on March 9, 2009, after tumbling 57% from its Oct. 9, 2007 high, becoming the worst bear market since the Great Depression. Since its 2009 low, the blue-chip index has roared ahead at a blistering 19.45% average annual pace, including reinvested dividends.

The market has scored those gains with substantially less volatility than the only other bull market to hit its 8th birthday, noted Sam Stovall, chief investment strategist for CFRA. That other bull market would be the one that stretched until March 2000, ending with the third-largest bear market since the Great Depression. In the past 12 months, the S&P has only had 23 days when the market moved up or down by 1%. In 1998, the eighth year of the 1990s bull market, the S&P 500 had 85 such dates.

While there are many reasons for the bull market to continue, including the possibility of higher economic growth, lower taxes and reduced regulation, an eight-year-old bull market also gives investors reason to be worried – starting with the bull's advanced age. "Basically, bull markets don't die of old age – they die of fright," Mr. Stovall said. Usually, that fear is of recession, although few see one in the offing any time soon.

Fundamentals are worrisome, too. "This bull market's valuation is second-highest since WWII and is beginning to rival the elevated valuations of the tech bubble bull of the late 1990's," Mr. Stovall warned. Currently, the S&P 500 stands at 25 times its past 12 months, vs. 26 times earnings in 1998.

Clients aren't blind to the fact that the market is old and expensive. "Mostly everyone I speak with is aware that stock market performance has been phenomenal, and is concerned about its continuance," said financial planner Chris Chen of Insight Financial Strategists in Waltham, Mass. "These days, people ask if they should cash out and wait on the sidelines."

Many advisers are also aware of the market's age and costliness. Taking time to talk to clients about the risks of a crash is important, said Randy Burns of High Point Planning Partners in Downers Grove, Ill. He noted that even with a portfolio of 60% stocks and 40% bonds, investors lost nearly 30% from peak to trough in the last bear market. "And it recovered all of that and more in the years that followed," Mr. Burns said. "Last time I checked, market timing still doesn't work. Investors therefore need to diversify accordingly, and embrace risk in their long term investments. After all, the risk in markets is what creates premiums for patient investors."

Addressing those client worries can create an opportunity to remind investors of their long-term goals – and, possibly, revisit them, said financial planner Theodore Haley of Advanced Wealth Management in Portland, Ore. "We are telling clients to expect increased volatility," he said. "When clients call concerned about the all-time highs of the markets combined with the political uncertainty, we use the conversation as an opportunity to revisit their investment plan and recommit to staying the course, unless of course their lives have changed.

How bad could the next bear market be? Like unhappy families, all unhappy markets are different. The last bear market was triggered by a housing and debt crisis. But if your investors really are long-term investors, consider showing them how their funds have fared from October 2007 to now. That's a full market cycle – and most funds have not only recovered, but fared better than cash or bonds.

Top performing funds from the start of the last bear market to now
InvestmentTickerBear return*Bull return**Full cycle return***
Parnassus Endeavor InvestorPARWX-36.4%23.8%12.1%
PIMCO StocksPLUS® Small InstitutionalPSCSX-45.4%26.4%11.7%
PRIMECAP Odyssey Aggressive GrowthPOAGX-42.4%25.5%11.6%
Fidelity® Small Cap DiscoveryFSCRX-41.0%24.7%11.4%
Eaton Vance Atlanta Capital SMID-Cap IEISMX-33.7%21.9%11.3%
Brown Capital Mgmt Small Co InvBCSIX-34.5%22.2%11.2%
PIMCO RAE Fundamental PLUS InstPXTIX-50.8%28.1%11.0%
T. Rowe Price New HorizonsPRNHX-43.3%24.7%10.8%
Dreyfus Opportunistic Small Cap InvDSCVX-38.9%22.9%10.7%
USAA NASDAQ-100 IndexUSNQX-40.2%23.0%10.5%
AMG Yacktman Focused NYAFFX-33.2%20.6%10.4%
JHancock Disciplined Value Mid Cap AJVMAX-39.7%22.6%10.3%
Fidelity® OTCFOCPX-43.4%23.7%10.0%
AMG Yacktman IYACKX-35.5%20.8%9.9%
Scout Mid CapUMBMX-38.0%21.6%9.9%
Homestead Small Company StockHSCSX-42.7%23.4%9.8%
Undiscovered Managers Behavioral Val LUBVLX-50.5%26.3%9.8%
Diamond Hill Small-Mid Cap IDHMIX-43.1%23.3%9.8%
Janus Triton DJANIX-41.6%22.6%9.7%
Principal MidCap R5PMBPX-38.6%21.4%9.7%
T. Rowe Price Instl Small-Cap StockTRSSX-44.0%23.4%9.7%
American Century NT Mid Cap Value InstlACLMX-38.0%21.2%9.7%
JPMorgan Small Cap Equity AVSEAX-36.5%20.6%9.7%
Victory Sycamore Established Value RGETGX-36.3%20.6%9.6%
T. Rowe Price QM US Small-Cap Gr.PRDSX-42.0%22.6%9.6%
S&P 500-43.0%19.4%6.9%
Source: Morningstar. *10/9/2007-3/9/2009; **3/9/2009-3/3/2017; ***10/9/2007-2/28/2017


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