We are often told to use a long-term perspective when making investment decisions. This is easier said than done in the era of the 24-hour news cycle. For pessimistic investors, there is no shortage of events that could potentially derail the financial markets, i.e. President Trump, growing public debt, global recession, inflation, trade wars etc. Additionally, information is readily available via the internet to confirm investor fears and emotional biases.
Periodically, it’s good to take a break from the short-term noise and capture historical perspective. We’re not advocating making investment decisions based upon past cycles but rather bringing context to the current cycle.
The below chart illustrates Bull & Bear market cycles since 1926 (chart courtesy of First Trust):
Observations from the chart
Market has upward bias
Bull markets on average last 8.9 years vs. Bear markets last 1.3 years
Drops can come swiftly with average Bear market losses of ~41%
Lower growth and modest inflation could prolong the current Bull market cycle well beyond 7.8 years
Since 1980, recessions (pink color) have occurred every ~10 years
What is most likely going to derail the current market cycle?
Unexpected Fed action, i.e. more aggressive rate increases than the market expects
President Trump’s fiscal agenda falls short or gets hung up in political gridlock
Protectionist Trade Policies
Excessively strong U.S. dollar
Investors that make drastic changes to their asset allocation during times of market stress are usually the last to get fully invested when the recovery happens. The decision to abandon an investment strategy and raise cash is a two-part decision; when to sell (easy) + when to get fully invested (hard). Emotional investors get the second decision wrong 99% of the time.
There is always going to be a myriad number of reasons to be skittish about the financial markets. Savvy investors make sure they understand the range of potential outcomes (risk) within their investment portfolio before a market correction happens. The time for shaping a risk efficient portfolio starts now (don’t wait for a market event to do something!). You can stay fully invested, confident that your plan will not be derailed by irrational decisions.