12/28/2018 Weekly Update: 2019, A Good Year for Stocks?

Weekly Recap                                                                        

S&P 500                +2.92%

10 Year Treasury   +0.57%

Gold                      1.92%

Volatility              -4.18%

Weekly Update: 2019, A Good Year for Stocks?

Last week I went on a bit of a tirade against Jerome Powell.  While I still maintain my beliefs that his decision was ridiculously misguided, I have faith that he will, ultimately, adapt his policy to match market conditions.  Even in financial markets, the saying better late than never can apply.  I wanted to close the year on a positive note, so I thought I would share my positive market outlook with you.  After all, I have two viewpoints of the current market, which I will explain in a moment.  The first viewpoint is that this is the beginning of a much deeper market dive, ala the Tech Bubble and Great Financial Crisis.  But my other, more hopeful view is that we are in the middle stages of a much longer bull market cycle.  I am aware that the two views are in complete conflict, but I’ll just say that for now it is a bit too early to tell.

One of the things that can make reading the markets so difficult is that we have to patiently wait for the market to confirm its direction.  What I mean is that we learn more about the overall direction of the stock market, not from the first “leg” down, but rather how it responds on its second “leg” down.  If the move down from the October highs through the “Christmas Eve Massacre” was the initial downward leg, then we need to wait to see how the market responds after we get a bit of a relief rally.  If we break, convincingly, the low levels set on Christmas Eve, then we may be in store for a significant bear market.  On the other hand, if we don’t go below those levels, then the market may play out according to my more optimistic prognostication.   

The Optimist

I believe market views alter depending upon the lens we apply.  If we focus our attention to the markets over the last 18 years it would seem the stock market’s life is a Hobbesian existence, “Nasty, poor, brutish, and short.”  However, if we swap our telephoto lens for a wide-angle lens, we might see that bull markets are quite a bit longer than we typically give them credit.  The financial media and many market analysts use the 20% retracement from the highs to mark the end of the bull market.  While the mere act of measuring something implies that you have to draw a line somewhere, not all 20% retracements are created equal.  Below I’ve charted the history of drawdowns, or retracements, in the S&P 500 going back to 1950.  As you can see, some 20% retracements are short-lived, while others represent the beginning of a much deeper bear market.

The yellow line marks a 20% retracement.  The measurements are on a weekly closing level (Monday the market closed down 20% from the highs before bouncing back above that level).  Naturally, our attention focuses on the significant bear markets:  1973-1980, 2000-2003, and 2007-2009.  These were deep market corrections that lasted a significant period of time.  We also notice that over the past 18 years we have had more than our share of negative markets, and we would be right in believing that, because we have. 

I would contend, that while it seems as if the Tech Bubble and Great Financial Crisis were two separate bear markets, they were really part of the same larger bear market cycle.  I believe that markets are made up of larger cycles, which typically last between 12-18 years.  bull cycles are longer, closer to 18 years, and bear cycles can last around 12 years.  The deeper troughs seen above, with the exception of the 1987 thirty percent correction, are all part of cyclical bear markets.  The thinner, shallower corrections are bull cycle corrections.  The chart below illustrates the cyclical pattern of the market, as I described it:

I was unable to include the top graphic on this chart due to the system restraints of Yahoo Finance, but needless to say we can get the picture.  Each “bar” represents one month.  The bull cycle from 1950-1968 lasted 226 “bars” or months and witnessed return of over 550%.  The subsequent bear cycle lasted around 137 months, with no price appreciation.  The 1982-2000 bull market saw a price appreciation for the S&P 500 of 1200%.  That cyclical bull market ended in 2000 and the following bear cycle lasted until the S&P 500 made new, high prices in March of 2013.  I’ve attached another chart below with a closer look at our current cyclical period.

Here you can see that we are only 68 “bars,” or months, into this bull cycle, and have only seen a price appreciation of 87%, when measured to our October highs.  When compared to the length and magnitude of the previous bull cycles, it would appear as if we have longer and further to travel on this bull market ride. 

It is not easy to be bullish, or positive, in the midst of so much negativity.  When they tell you that there is no free ride to profits in the market, this is what they mean—sometimes, the cost is discomfort and short-term pain.  Take a look again at the 1982-2000, the 1200% gains were not achieved on a straight path, there were numerous periods of pain and discomfort.  For 2019, the path will certainly be bumpy, but, until proven otherwise, I will keep faith in the longer-term cyclical nature of the stock market.

Happy New Year!

Thanks for reading,

Zach and Dave

Calibrate Wealth
515-371-5316  

https://www.calibratewm.com/blog-01

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