This Isn’t the End of the Bull Market

Where is this market going? Is the bull market over? Have stock prices already peaked? Is this as good as it gets for earnings and the economy, and is it downhill from here? Should I get out of the market?

These are all perfectly legitimate questions investors should be asking themselves. While no one can predict the future, I will attempt to answer these nagging concerns in this article.

First, let’s take stock of where we are in the cycle.

We are in the 10th year of a bull market that is already the longest in history, and the 10th year of a recovery. From a historical perspective, both have already gone on longer than they should have. Investors feel like they’re playing musical chairs, and the music has been playing for a really long time.

This October is reminding us that the market does indeed go down, too. The Nasdaq already plunged into correction territory, down at least 10 percent from the high, and the Dow and S&P 500 aren’t far behind.

I don’t think the selling is over either.

In addition to the fears that this is late in the cycle and things can only get worse, there are several other issues spooking investors. The Fed rate hikes are starting to finally bite, with inflation picking up and the 10-year Treasury threatening to go well above 3 percent. At the same time, the global economy is slowing.

Tightening financial conditions amidst slowing growth isn’t a good combination for the market. Then there are trade war fears, the impact of Trump’s tariffs and a mid-term election that could make the political environment even more toxic.

Is this the end of the bull market?

I doubt it. Bull markets don’t die of concern about pending risks, which exist in any market at any phase. They typically die from recession. And there is no sign of recession on the horizon.

The economy is booming and earnings have been spectacular, growing at a year-over-year pace of better than 20 percent.

Of course, much of that huge number is the effect of the tax cuts. But next year’s projections look strong and 77 percent of companies have beaten expectations so far in the third quarter, and 59 percent are beating revenue expectations. Meanwhile, second quarter GDP grew at 4.2 percent and third quarter growth came in at 3.5 percent, a huge increase from the average 2.3 percent growth in this recovery.

This isn’t the way an economy and bull market look before they keel over. In the absence of some devastating black swan event, the economy and earnings should remain solid for the foreseeable future.

It could well be, however, that this is a peak. It is entirely possible that earnings and economic growth are topping out. But that’s not the end of the world.

Typically, there is still another year or two of solid returns in the market between peak growth and recession. It is also entirely possible that the final phase of this bull market lasts longer than past ones.

Until recently, this had been the weakest recovery in the post World War II era. That means normal excesses that build up by now are behind schedule. As well, it is unusual for a recovery to get turbo charged with tax cuts and deregulation at this stage of the cycle. And now the market is much more reasonably valued. It could be that this bull market has several years left in the tank.

There will surely be another bear market at some point. But I don’t think this current selloff is the beginning. While it’s prudent to take profits where stocks have gotten overextended and raise cash so you have dry powder to buy stocks cheap if a bear market comes, I think it’s a mistake to try to time the market and sell all or most of your holdings.

Market timing has proven to be a losing strategy. I have a friend that tried to time the market during the selloff in 2011, he’s still waiting to get back in. Let’s say you sell out and the market goes another 50 percent higher. Then what? Suppose you sell out your portfolio and the bear market hits now, when do you get back in? Few investors are anxious to try to catch a falling knife.

I don’t think this is the end of the bull market. But even if you’re invested through a bear market it isn’t the worst thing. I’ve been invested through several bear markets.  It’s painful in the short term. But stocks always bounce back. If you actually put more money in the market when its down you end up enhancing your long-term returns.

Don’t let the headlines scare you away from superior returns. Be an investor, not a market timer. This is most likely a buying opportunity.