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The Independent Adviser for Vanguard Investors
•
November 2016
•
13
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800-211-7641
Where do we stand today? Despite
what the headlines and political rheto-
ric may have you believe, the U.S. has
been in a stock bull market as well
as an economic expansion for about
seven and a half years. The proof is in
the charts on page 12. The first shows
the length of each economic expansion
(as defined by the National Bureau of
Economic Research) since the Great
Depression. The second chart plots
each stock bull market with its dura-
tion on the x-axis and its price gains (I
used the Dow) on the y-axis. Neither
the current bull market (which began
on March 9, 2009) nor the economic
expansion (which started at the end of
June 2009) is at an extreme. However,
if we get through the next presidential
term without a hiccup, the bull market
and economic expansion will both have
reached record lengths.
It is entirely possible we could set
new records—there’s no immutable law
that we have to experience a stock bear
market or recession each decade—but
in terms of setting expectations, history
suggests that regardless of who wins
the presidential election next week, it
would not be surprising to see a bear
market as well as a recession occur
under their watch.
As I said at the outset, I’m not
predicting or forecasting a bear mar-
ket. I’m just saying it is reasonable
to expect one to occur at some point
during the next presidential term. (Of
course, there’s always the possibility
that we could also see a bear market
before the next president takes office
in January!)
Stock returns are notoriously hard to
predict, though that doesn’t stop many
from trying. When it comes to the bond
market, it’s a different story as a bond
fund’s yield is a decent predictor of its
future returns. (Dan and I will dig into
this idea in detail in the coming months.)
So, with Total Bond Market yielding just
1.88% today, the return prospects from
bond funds aren’t inspiring.
With all this being said, I don’t have
any predictions for you. But I do have
two additional expectations I’d like to
set: First, the next bear market likely
won’t be as bad as you fear. The past
two bear markets have been particularly
hard on investors—the bursting of the
tech bubble saw 500 Index fall 44.8%,
taking 50 months to recover that loss,
and in the credit crisis the index fund
slid 51.0% and took 42 months to recov-
er to prior highs. It is natural to look at
the recent past and to expect the next
bear market to match those declines, but
the fact is that most bear markets don’t
turn into crashes. Of the 12 bear markets
(defined as a 20% or greater decline)
experienced over the past six decades,
the median drawdown was 25.8%, and
only three saw the 20% decline turn into
a drop of 33% or greater.
Also, just because I expect a bear
market down the road, don’t expect me
to recommend drastic portfolio chang-
es, such as selling out of stocks and
hiding in cash. Why not? First, I don’t
know when the bear market will happen
or what will be the cause of it (though
there are any number of pundits who
are currently guaranteeing a bear mar-
ket next month, next quarter or next
year). Second, once we do encounter a
bear market, I also expect we’ll recover
any losses suffered and go on to reach
new, higher ground—but, again, the
timing of and catalyst for those eventu-
alities are unknowable.
And finally, if my expectations are
too low, and we avoid a bear market,
well, I’ll be pleasantly surprised and
doubly glad I committed to spending
time in the markets rather than trying
to time them.
Any way the future plays out, hav-
ing the proper expectations, rather than
basing your portfolio strategy on pre-
dictions, will make it easier to handle
the inevitable ebbs and flows of the
markets.
n
WINTER WAS GOOD
to tech investors
for a couple of years, but last year we
got frozen out as
Tech Winter
was a
bust.
Most of the time, the November-to-
February period I refer to as
TechWinter
is a four-month market season when
tech stocks shine and active managers
with large tech holdings shine even
brighter. Then there are periods like the
last one, when tech was in the tank.
From the end of October 2015
through the end of February 2016, the
MSCI Information Technology index
fell 8.1% versus
500 Index
’s 6.4%
decline.
Information Technology ETF
dropped 8.3%. Among the sector funds,
only
Financials ETF
and
Energy ETF
fell further, down 11.2% and 16.6%
respectively.
Managed funds with large tech
holdings didn’t hold up their end of the
bargain, either.
PRIMECAP
fell 7.7%,
Growth Index
was off 8.5%,
Morgan
Growth
dropped 8.9% and both
Capital Opportunity
and
Explorer
declined 10.1%, for example.
Of the four Fidelity sector funds that
cover the tech industry, only
Fidelity
Select Electronics
was able to outpace
the market, dropping 5.8%. Fidelity’s
computers, software and broad technol-
ogy funds all fell further than the
SEASONALITY
Tech Winter: A Cold Wind Blows
>
It is entirely possible we could set new records—
there’s no immutable law that we have to experience
a stock bear market or recession each decade.