Bull Market is 'Long in the Tooth'

02/05/2015 9:00 am EST

Focus: STOCKS

James Stack

President, Stack Financial Management

In the latest University of Michigan/Reuters’ Consumer Sentiment survey, one-half of the respondents expected the US to avoid a recession in the next five years, the highest in a decade. And investment advisors are almost universally bullish, notes market historian Jim Stack, editor of InvesTech Market Analyst.

So why are we growing more concerned in our outlook? The answer is: History.

Almost by definition, bull markets peak when optimism is highest and the greatest number of investors are bullish. Surprisingly, they also tend to peak when economists see no storm clouds on the horizon.

From almost every historical perspective, the current bull market is undoubtedly getting a bit long in the tooth. Most bull markets last between two and five years and the average life span since 1930 is just 3.8 years.

In contrast, today’s bull market—at 5.8 years of age—is already two years longer than the average and may soon become the third longest bull market of the past 85 years.

As a result of the strong dollar, falling oil prices, and rising consumer confidence, economists and market prognosticators are in unison forecasting “a very good year ahead!” And that universal bullish consensus would make any market historian nervous.

We concur that the bull market remains intact and the outlook for 2015 seems bright. But we also know that the stock market leads the economy and bull market peaks typically occur at least 3-6 months before the start of a recession. In addition, a recession is never recognized until many months after it has been underway.

So this requires us to be forward thinking in both our analysis and strategy. Consequently, we consider the universal bullishness among economists and analysts to be a warning flag rather than a positive development.

For an investor in their twenties or thirties, the greatest risk is not following a disciplined long-term strategy that sets aside a certain amount for investing every month, regardless of one’s emotional swings.

Yet, by the time an investor is in his forties or fifties, the frequency and size of bear markets start to matter. And, for someone in their sixties or older, and nearing or in retirement, the devastation of a major bear market can literally turn one’s best laid retirement plan upside down.

In the past 80 years, every bear market except one (1956) has repossessed one-half or more of the previous bull market’s gain. Considering that the DJIA is near 18,000 and this bull market started at DJIA 6547 on March 9, 2009, it means the next bear market could easily fall 6,000 DJIA points or 35-40%.

This is the time to be more watchful and careful, instead of throwing caution to the wind and aggressively chasing today’s momentum stocks. We now believe the odds are very high that the start of the next bear market is looming within the next 12-18 months.

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