The Big Picture
“What is the stock market going to do?” “Are stocks going to rise in price over the next year?” When presenting at events, these are questions I typically and regularly receive. At Mariner Wealth Advisors, our house view has held that we are in a bull market and that stock prices, over time, will rise. We have stated the peak in prices for this cycle have yet to be reached. So far, so good. As of this writing, the S&P 500 recently hit new all-time highs.
But I suggest most are focusing on the wrong question. Instead of the questions above, I think, “What return do you think the market will provide over the next number of years,” and, “How does that scenario fit in with my financial plan?” are the relevant questions most investors should ask. Focusing on the long term, rather than the short term. While short-term analysis is appealing and grabs people’s attention, it is the long term, the big picture, for which most should be concerned.
Neither I, nor anybody else, knows where stock prices will trade in the future. I certainly have a suspicion, but I don’t know the outright answer to that question. That disclaimer being made, what do I suspect will happen over the long term? The answer to that question is the theme of this commentary.
From Where We Come
I am one of the oldest associates at Mariner Wealth Advisors. The positive side of that statement is that I am also one of the most experienced associates. To provide a framework from which I come, I entered the professional investment arena in 1979. I am celebrating my 40th anniversary of dealing in the markets. When I came into the business, the Dow Jones Industrial Average was selling at 822 (5/31/1979). Now the Dow is at 27,000. The above chart, courtesy of Thompson/Reuters, shows the history of the Dow since 1979.
If one had purchased the Dow at that time and reinvested dividends, the total return over that period would have been +10,910 percent. For every dollar invested, the total gain would have been $109.10. An investment of $10,000 in the Dow in 1979 would be worth almost $1.1 million today.1 The after-inflation return for the market has been a stunning +8.8 percent annually over the last 40 years.2
So, I’m a child of the bull market. Most of us younger than 70 years old are children of the bull market. Most of us believe in the long-term validity of stock ownership. Few investments have outperformed U.S. stocks over the long run. This is the big picture.
The Big Picture
I have long believed, and witnessed, the reality that longer-term stock valuation levels and investor preferences tend to rise over certain periods and contract over others. I’m not talking about the traditional cyclical or shorter-term market cycles, but rather longer-term secular trends. It is highly important for investors to understand which macro-environment we are experiencing. Are we in a secular bull or secular bear market? The answer to this question gives us important insight into what we should expect from stock prices.
According to our friends at Ned Davis Research (NDR), the U.S. stock market has experienced four previous secular bull markets and four previous secular bear markets since the year 1900. These aren’t cyclical, or shorter-term periods, but periods where owning stocks was very rewarding and periods when owning stocks from point to point, cost investors capital value.
Let’s bring some numbers to those statements. The breakdown of the secular markets has been:
The long periods classified as secular bull markets have been periods when stock prices rose rather dramatically. I’ve lived through portions of two secular bear markets and two secular bull markets. Some takeaways from these historical observations follow.
If an investor held the stock index during the typical secular bear market, they would have experienced an average price change of -4.9 percent per year. While this doesn’t seem to be that big of a deal, the -4.9 percent annual return was per year, over an average of 13 years. That equates to an average loss of 48 percent of capital. That is a big deal!
On the other hand, if an investor had held the stock in the index over the typical secular bull market, the return of 15.1 percent per year equates to a return of 616 percent over that period. The bulk of price change in stocks has been centered during the 56 years of secular bull experience over the 109 years from 1900 to 2009.
There obviously have been periods, on a cyclical basis, when stock prices rose during secular bear markets, and cyclical periods when stocks declined during secular bull markets. The point here is the big picture — those periods when the overall price changes have had a natural positive or negative bias.
Stock prices tend to trend higher during secular bulls; indexes tend to grind to higher highs and higher lows over a long period (see chart above which details the S&P 500 since 2009). During secular bear markets, indexes struggle to make new highs, failing over various periods of time to do so.
From a historical standpoint, stock market downturns have been less severe during secular bull markets than during secular bear markets, in both time and intensity measures. This leads to the right-footed decisions to lessen trading activity during secular bulls and increasing trading activity (taking profits) more aggressively during secular bear markets.
The people at Ned Davis Research have stated that they think U.S. investors are experiencing the fifth secular bull market since 1900. We took the stance early in 2013 that the U.S. market was in a secular bull phase. We’ve continued that view during the last six-plus years, maintaining a positive bias toward the U.S. equity market.
Where do we currently stand? From both cyclical (shorter-term) and secular (longer-term) standpoints, we maintain our positive bias toward U.S. equity markets. Gross domestic product (GDP) growth is still positive. We expect it to continue for at least the next 12 months. Central banks are conducting monetary policies that add high levels of liquidity to the world’s banking systems. Inflation remains tame on a global scale and interest rates remain low.
That being said, we remain vigilant in our outlook. We monitor trends that historically have given us advance notice of a brewing problem. For the time being, the balance of the evidence suggests the U.S. stock market should continue to grind to higher valuation levels going forward.
So, getting back to the original question raised at the beginning of this piece, “What should investors expect from the U.S. equity market?” Remember the big picture. Work directly with your financial advisor as to what this may mean for you and your family.
As long as the current secular bull market continues, we believe it is the wise investor who invests willingly and sells grudgingly.
1Investors cannot invest directly in an index.
2Data per DQYDJ calculator
This commentary is limited to the dissemination of general information pertaining to Mariner Wealth Advisors’ investment advisory services and general economic market conditions. The information contained herein is not intended to be personal legal, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy. For additional information about MWA, including fees and services, please contact MWA or refer to the Investment Adviser Public Disclosure website.
The S&P 500 Index is a market-value weighted index provided by Standard & Poor’s and is comprised of 500 companies chosen for market size and industry group representation.
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