I thought in addition to all the talk about how to invest during this coronavirus and the various comparisons to 1987 etc. that it might be helpful to look back at the market and how fast it typically recovers and what we should expect.
First allow me to review secular markets for you. This is the most important concept that I teach when looking at strategies for your money. Instead of looking at “bull markets” that last between 4 and 5 years or “bear markets” that last 1 to 3 years, we look at secular markets that last 8 to 20 years. It is much easier to invest when you have a longer-term cycle to invest in.
This is important because the way you invest in a secular bear market is far different than in a secular bull market. I am going to review a few charts and then explain where we are now and what to expect. Hopefully this will give you perspective and calm your nerves about what is next.
This chart shows all the secular bull markets for the past 200 years. As you can see the average return at +13.20% per year is quite good and would have made you a lot of money over that 18-year period of time. Dalbar does analysis on individual investors and reveals that the individual investor does far worse than the averages to the tune of about 40% or even worse. Why is that? I think it involves a lot of different reasons, but the most important reason is that individual investors do not understand the markets, valuations and long-term cycles. As a result, they can be sold a bill of goods or they simply panic and lose out on the dramatic returns that are possible by simply sticking it out during a secular bull market.
Before I move onto a secular bear market let’s look further into our current market and see if it is clearly a secular bull market and as such will follow the same pattern. Our last secular bull market was 1982 to the beginning of 2000. What was the catalyst for that market cycle? Reagan became our president and immediately went to work on two things. One, the reduction of inflation and interest rates which were at historic levels. Two, the lowering of taxes for all Americans including a dramatic reduction of the capital gains rate. This is fundamental change in an economy that was faltering under the burden of high mortgage rates and high tax rates. The result of this strategy plus deregulation was a market that averaged over 14% for 18 years. That does not mean there were no downturns in the 18 years. In fact, in 1987 the markets plunged 25% in just one day. Some probably remember black Monday and the panic that ensued. Downturns within secular bull markets tend to be short lived and not as devastating. That downturn recovered within one year.
By comparison, during secular bear markets the downturns are more severe and take many years to recover. In the case of the secular bear market between 2000 and 2016, there were two dramatic downturns of over 50% and the recovery took 5 years or longer depending on the index.
As you can see from this chart, the 2000 to 2016 average return was a mere 3.5% per year for 16 years. And you can also see that the average return for secular bear markets is miserable at less than 1% per year.
So it is critically important to know which secular market we are in before considering the type of investment that we invest in and how we trade that investment. A simple rule is never to sell in a secular bull market.
Looking at our current situation, I cannot tell you how far down this market will go but I can tell you that selling will merely lock in loses because you will never be able to figure out where the bottom is and you will be late getting back in. History helps us reduce our mistakes in managing our money!
Right now the markets are down around 20% from the highs. I don’t believe that these markets will come even close to the downturns we saw in the last secular bear market and I do believe the recovery will be within a year. We must always understand that past performance is not necessarily an indicator of future performance, but very helpful in improving the probabilities of success.
The coronavirus will top out and eventually go away as all the previous viruses of the past that I summarized in my last commentary, but when in the eye of the storm… Stay calm, stay invested, and stay smart. Panic, fear, and blindly moving forward never quite make any sense. I will give you feedback on all that is happening and if my strategy changes. For now, I don’t believe that we can see the end, but I know it is out there and the more the government does to protect us from any insanity or exposure the faster this will all end.
Call me if you are having a hard time with this and Stacy will schedule a call or a meeting. I am here to help you succeed and I am constantly reading and researching and feeding you just the facts. Stop reading or watching anything that comes from the journalists because I have found their work to be conjecture and without factual basis. If you want me to comment on anything, please e mail me and I will research and give you the facts!
Just to put numbers to the growth for the DOW…
March 1982 2251
July 1987 5846
April 1990 5332
Dec 1999 17671
Over 14% average return since 1982, 18 wonderful years to invest.
June 2016 17981
That 16-year period of time, which is the secular bear market, made almost nothing for 16 years!