Why Bull And Bear Market Talk Is B.S.

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This is officially the longest bull market in history. Or so I am told.

According to CNBC, this bull market run is 3,455 days old. It began in March of 2009 and has eclipsed the previous record run from 1990-2000. A bull market is a period in which stock prices rise without experiencing a -20% or more decline.

The thing is, who cares?

Bull and bear markets are irrelevant. The terms mean nothing. Investor Joseph Fahmy sums this up well:

(source: twitter.com/jfahmy)

I could not agree with him more. I understand why so many people talk about bull markets and bear markets. We are conditioned to think about investing in those terms because the financial media fascinates about them.

And in fairness I can see why. It keeps it simple and we like simple.

Bull market = Good
Bear market = Bad

We typically like things explained in black-or-white terms. So we use bull vs. bear markets as a primary way of judging the overall stock market because it requires little time or thought.

The problem is, it provides no value. The market is anything but simple and the notion of debating whether the bull market will end is largely emotional. Investing should be process-based and as emotionless as possible. I cannot imagine someone basing their investment decisions on whether they think we're in a bull market or a bear market. 

If someone asks me how long I think the bull market will continue here is what I say: The overall U.S. market remains in a rising trend, which to me, started back in the summer of 2016. When I say rising trend I mean the price trend of the S&P 500 index. It is based on the various timeframes we analyze. Until that rising price trend is broken, the benefit of the doubt goes to the market's ascent.

I will leave the bull market/bear market mumbo jumbo to others and instead continue to focus on the price movement of the stocks that comprise the overall U.S. market. To anyone who manages money, I would recommend they do the same.

In The Market...

The S&P 500 gained +0.9% last week. Let's look under the hood:

(price data via stockcharts.com)

The S&P is sitting at a new record high. The growth sectors all finished in the green while the dividend-heavy sectors (Real Estate, Utilities and Consumer Staples) were the lone losers. I found it interesting that bonds rallied (interest rates lower) amid the rise in growth stocks. But oh well.

We are fully invested across all of our portfolios and continue to be weighted toward Technology, which continues to lead the overall market higher. The Tech sector jumped to a record high as well and remains the healthiest looking sector out there.

If the market can continue to rise into September it may set up for a very nice end to the year. Seasonally speaking, the fourth quarter is the strongest. There is nothing more bullish than new price-highs and we are seeing them across many stock names.

In Our Portfolios...

What's New With Us?

It was a weird weather weekend here in Seattle, between the overcast and the haze that is still present from the B.C. fires. I managed to get some yard work done. While the smoke was bad early in the week, by the time most of it cleared on the weekend I'm not sure the air was any worse than it normally is in other major cities. I suppose we must be conditioned to having the cleanest of air.

Have a great week!

Brian E Betz, CFP®
Principal

And The (Real) Winner Is...

/ Percension Wealth Advisors, LLC/

In The News...

Things aren't always as they appear. Last night's Oscars proved as much.

U.S. stocks climbed for the 5th-straight week, as talk of fresh highs and bull markets swept headlines. No doubt the year has started out nicely for stocks, but last week felt slightly deceptive. I would argue that the bond market was the true winner.

It has been a while since we've seen the bond market rise in unison like it did last week. Before going further, remember that not-all-bonds-are-created-equal. People use the word bonds to define an entire market, which is lazy and wrong. Some bonds live longer than others (1yr, 5yr, 10yr, etc.) and some are riskier than others (high-yield, investment-grade, treasury, etc.). Differing maturities and risk factors result in varying dividends and how each bond-type reacts to changing, overall market conditions.

Here is a quick cheat-sheet:

  • U.S. Treasuries -- Safest of the bond universe because your principal investment is backed by the U.S. government, which is more reliable than any corporation or other nation's government. The longer the bond term, the higher the interest rate paid (e.g. 10-year treasury bond > 2-year treasury bond).
  • Investment-grade corporate -- Issued by companies that have a S&P credit rating of BBB- or better. These offer a higher interest rate than similar-term treasuries. The healthier the company, the lower the interest rate offered because the company can more reliably pay back the principal you effectively lent to invest in their bonds.
  • High-yield ("Junk") -- Issued by companies with a credit rating of BB or worse. They are structured like investment-grade corporate bonds, but are issued by financially weaker companies. In exchange for accepting a higher risk of principal default, these firms pay a higher dividend to entice investors.
  • Preferred stock -- We lump preferred stock into the bond family, despite technically being stock. The dividend is comparable to a high-yield bond (at least currently). Companies must pay preferred stockholder dividends before they pay common stockholder dividends but after they pay corporate bondholders. As such, preferred stock has less ability to appreciate than common stock but more ability to do so than corporate bonds.

Low risk/low return bonds like U.S. treasuries and investment-grade corporate bonds got whacked post-election and have struggled to rebound in 2017. Meanwhile, higher risk/higher return bonds like high-yields have benefited from the stock market rally because of their stock-like characteristics.

Last week, treasuries and investment-grade corporates quietly moved higher. Why does this matter? There is sometimes (not always) an inverse correlation between stock and conservative bond values. A rise in treasury bond demand often foreshadows what is to come within the stock market, often implying that stocks will flatten or fall in the near future.

It can be dangerous to assume too much, but last week's bond gains are worth watching. As mentioned, the S&P 500 has risen five weeks in a row. Six weeks is pretty rare and something not seen since Oct. 2015. I hate using the phrase "it makes sense" because the market most often does not, yet it would not surprise me if stocks take a breather here. Even if only for a week or two.

We will see if my analysis is right.

In The Market...

The S&P 500 climbed +0.7%. Let's look under the hood:

Last week was no doubt solid, but the S&P index's positive return does not tell the whole story. Two things caught my eye.

First, virtually all of the week's gains happened in the first two hours of the week. The index waffled the rest of the time and even looked to be losing momentum before rallying in the final hour on Friday. A really strange week, in a sense.

Second, defense carried the load. Utilities, Consumer Staples and Health Care -- defensive sectors possessing less economic sensitivity -- led all sectors. This could point to a sea change at the sector level, where we may see a shift away from the sectors most sensitive to changing business conditions. A potential bond rally would likely boost these defensive sectors as well. We would gravitate toward these sectors if investors continue to play defense by migrating into bonds or cash.

In Our Opinion...

To avoid any confusion, we remain upbeat about the state of the market. I turned bullish late last summer and so far it appears the market has awoken nicely from its 18-month slumber. Recall this monthly chart of the S&P 500 index that I shared a few weeks ago.

(source: stockcharts.com)

The pattern has been that every 5-10 years the market simply flattens out for a stretch of time (areas shaded grey). Most recently the 2015-2016 period. The above chart of the S&P excludes dividends, and while those certainly matter, the picture remains largely the same.

I think this is a good reminder because it is easy to get caught up in short-term market movement. There is always potential for lulls, dips and crashes but overall the market has a long-term bias to move higher.

In Our Portfolios...

Stocks: We sold our Nasdaq-100 fund (QQQ). This is less of a statement about the prospects of the tech-heavy index it represents and more to do with potentially better alternatives in other sectors. As such, the cash proceeds should be reinvested soon. We purchased a Consumer Discretionary sector fund (XLY) within large accounts and more aggressive accounts.

Bonds: No major changes last week. We added to our high-yield bond position within certain accounts. High-yield bonds have been a strong pocket of the market these past few months.

Q&A / Financial Planning...

Someone reached out to me last week about helping him and his wife figure out which funds to select within their 401k plan. It can be a challenge choosing between the funds offered, depending on the number/types of funds offered and your familiarity with them. If you are struggling to decide how to allocate your 401k account, let us know. You should not make a hasty decision and you absolutely want to ensure that the funds you select are the best among those offered for your specific needs.

What's New With Us...

A quick reminder on text messaging: Please refrain from doing it.

We prefer you call or email if you have a question. As a RIA firm we must archive all written communication we have with you and it is easier to do so via email as we automatically log all emails sent and received. I realize this can be tough to remember, but it makes our archival process easier without text messaging. Obviously if something is urgent then contact us the best way you can, even if that means texting, but generally please try to call or email when possible.

Have a great week,

 

Brian E Betz, CFP®
Principal