No, the title to this article is not a misprint. This morning at 2am Americans turned their clocks forward to mark the beginning of Daylight Savings Time. However, investors should take a look back to exactly three years ago when the picture was quite different from what it is today.
On March 9, 2009 the stock market was in the throes of a vicious bear market which from the top, set on October 9, 2007 the Dow Jones Industrial Average and the broader Standard & Poor’s 500 had declined 53.78% and 56.78%, respectively. In fact, all the major U.S. Indices had fallen more than fifty percent. Investors were reeling.
However, approximately one week prior to what turned out to be what is most likely a generational bottom (see buy of a lifetime), we penned an article that appeared in The Record entitled “Perform Your Own Stress Test” in which we recommended that investors conduct their own test by lopping off twenty percent of their then portfolio value and that “should you pass your own stress test, be patient and tune out the daily noise.”
Furthermore, approximately three weeks after the March ninth bottom another one of our articles appeared in The Record entitled “Try The Irrational” in which amidst all the dire projections, we noted that “at the top of a bull market there are few pessimists. At the bottom of a bear market there few optimists.” We observed further that “at the current time, investors are experiencing the worst ten-year stretch since the ten years ending 1938. Sounds like investors over the next ten years might be amply rewarded for the pain they have endured over the prior ten.”
Since that March date three years ago, the major indices have soared with the Dow Jones Industrial Average nearly doubling while the Standard & Poor’s 500 has more than doubled in value. For those that were claiming that they were “going to get back into the market once the economy looked better,” they were the losers as what they did not realize is that the stock market is a discounting mechanism and it therefore bottoms approximately six to nine months ahead of economic turns.
While it is certainly easy to predict yesterday’s weather, it is much harder to forecast tomorrow’s. Where will stocks go from here? We believe that for long-term investors, those with time horizons of more than twelve to eighteen months, there is still a lot of opportunity. However, after the more recent twenty-plus percent run-up investors have had off the August 2011 lows, a pause to refresh in the form of a mid-single digit pullback would be welcome. We would use such a pullback to add to long-term positions.
For bond investors, be careful. We forecast a modest normalization in the economic cycle, one in which government stimulus gives way to private sector growth, that will eventually cause a rise in interest rates and bond prices to fall. With this in mind, we generally recommend that bond investors stay away from long-dated bonds and from bond funds with average maturities of more than twelve years. We are late in the game for bond investors. Caution is certainly the better part of valor in this asset class.