Money Talks: Lessons from the past
Investors here in paradise have been overwhelmed with any number of issues from the recent brush fires to a mesmerizing stock market which seemingly will grow to the sky. Here is where we should step back and take a look at some of the lessons from the past.
A recent USA Today article touched on what should be a “hot button” for any retired investor. The basis was the various signs of a bear market, which at this point seems to be completely off the radar. The Trump effect continues to buoy this otherwise over heated stock market. History has shown us that there are certain catalysts and tendencies which have all occurred prior to a market correction, or a “bear market.”
Yes, the lessons from the past are many, and we are certainly observing various signs that the bear may be well on the way. In keeping with The Trump effect and the baseless rally we are currently experiencing, the USA Today article touched on the following which sound all too familiar. One of the most common signs is what was referred to as “extreme optimism.” Certainly this would apply to all things Wall Street currently. The unbridled enthusiasm, especially on the heels of the recent low enthusiasm pre-election, certainly could be cause for alarm.
Consider the following from the article; “The more bullish, optimistic and confident the investing public is, the riskier the market becomes … bull markets peak when optimism is highest.” So, does this sound familiar to anyone? For the record, there are specific indicators used to gauge investor sentiment and the most commonly accepted is the “fear gauge” also technically referred to as the VIX, which by the way, according to this article is “hovering around all-time lows.” This essentially indicates that investors of all types are confident and even to a point, perhaps a bit complacent as to the state of the markets. Although this does not guarantee any immediate losses, certainly this would not be an industry wide recognized indicator of it did not hold plenty of merit; i.e. Statistical relevance in the form of a proven track record.
Yes, lessons from the past can tell a story of both good and bad. Here is where retired investors may remind themselves that the secret of long term success in the markets can often be attributed to controlling our greed factor. In other words, consider the following; according to S&P Capital IQ, “Since World War II, the average bull market has lasted only a little bit over 4 years…only three others have even made it to six years.” Here lessons from the past may have some bearing our portfolio allocation in the immediate future. According to this research piece, the “current bull market began in March, 2009.”
We do not need a Chinese abacus to figure out that the current bull market is nearly twice as old as the average since World War II, not to mention that the majority of this run was attributed to the Fed and their “artificial stimulus” which buoyed the market for years. This stimulus is now behind us and the financial markets are forced to stand on their own.
Now by no means does any of this empirical knowledge guarantee when this market will finally correct, however lessons from the past tell us now certainly is the time to consider portfolio reallocation to implement some type of protection.
It is also worth noting that The Fed has made it clear that rates will begin to rise, yet at the same time they have been extremely cautious so as not to rile the financial and stock markets. Again, lessons from the past remind us that rising rates have historically put downward pressure on stocks in the form of added costs of conducting business, not to mention that any and all bond holdings will also be impacted negatively, potentially at the same time.
Now more than ever we must embrace the value of non-correlated assets such as managed futures and insured index strategies which certainly pave the way to the life of a SWAN, Sleep Well At Night.
William F. Hague is a managing partner of Hague Wealth Management; 239-389-1999 or WFHague@earthlink.net. The opinions and observations stated above are those of the columnist.