Flat Returns Test The Impatient, And It Is Happening Right Now
First, for those who think of me as one of those perma-bears, I am nothing of the sort. I can’t wait to invest in the next U.S. stock bull market. But first, we must muddle through a period of negative, or at best weak positive returns. So, in that sense, I guess I am a realist. And there is something going on right now regarding the very popular approach of investors looking at trailing returns on their investments. If the current cycle is like many that preceded it, there will be confusion, frustration and ultimately some very bad moves made by investors attempting to get a “quick-fix” in their portfolio. The two charts below will show you what I mean.
This first one shows that the S&P 500 Index has been about flat since the start of November 2017. That is over 14 months during which perhaps the most popular investment in many portfolios has produced about zero return. That is par for the course with long-term investing, and it also reinforces the impact that bear market cycles have on long-term returns for those who just sit there and take it. That’s why I am such a fan of tactical investing. You don’t have to sit there and take it. You can defend and potentially even exploit down markets in stocks, bonds or both.
In this second chart, we see a similar but more serious situation. This is a picture of the S&P 500 as of the 12/24/18 bottom, from which the market recently popped back up for 3 weeks. My guess is that a lot of investors and financial advisors are just considering this a false alarm. Maybe it is. But if the market does what we technicians typically see it do, and “test” the recent S&P 500 lows around the 2,350 area during 2019, that will extend a pretty long period of flatness for the popular index. Specifically, from all the way back to 2/28/17 through that 12/24/18 bottom, the S&P 500 was down about one-half of one percent. That’s a period of 22 months! That may not seem like that big a deal, but should the market languish or decline through much of 2019, that period of flatness in returns will stretch back further. This is what happens in bear markets, and while it is there for the naked eye to see, it is often ignored because investors are still thinking the glory days are here.
This is a situation I refer to as “counting backwards” as the failure to get out of the 4th quarter 2018 rut continues. Perhaps it will all resolve itself soon and none of this will matter. But as I have remined you recently in this space, the best thing any investor or financial advisor can do is to take account of what is going on, analyze it in terms that makes sense to them, and translate that analysis into action.
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