- As the market is celebrating its third anniversary without a single correction next month, investors are becoming increasingly worried that a significant correction or even a bear market is imminent.
- However, no-one can time the market consistently. Humans tend to predict what just happened instead of what is about to happen.
- There are still many experts waiting for the final collapse after the one 5 years ago. They cannot realize that the collapse occurred and is not going to happen again.
- The current bull market has been fueled not only by the Fed but also by the great (once in a generation) expansion of the American companies abroad.
- As history has taught us, the market advances to unprecedented highs every 10-20 years. The market currently seems to be in its first steps of its generational advance.
As the market keeps recording new all-time highs, more experts attempt to call the market top and the beginning of a new bear market and advise investors to protect themselves from the imminent collapse. The nervousness is accentuated by the approach of the termination of Fed's support program, which has greatly contributed to the breathless 5-year bull market we have been witnessing. Moreover, the market is celebrating next month its 3rd anniversary without a 10% correction, which is just another factor of concern for most investors. Nevertheless, I will explain why the investors should remain calm and not sell their stocks as long as they possess solid fundamentals.
First of all, the market has always been completely unpredictable. To be sure, the most legendary investors, such as Warren Buffett and Peter Lynch, have repeatedly admitted that they cannot time the market and it is useless to attempt to. Whenever they pinpoint a stock with great potential, they purchase it without ever thinking about the economy, interest rates or where the market index is heading. Actually, the current 5-year bull market has been characterized by the greatest wall of worry ever. From its very beginning, we have been hearing from experts that it was only a "relief rally" and a double-dip recession was imminent. Whoever believed those "experts" missed a generational investing opportunity.
Some will disagree and recall that some economists, such as Nouriel Roubini, predicted the Great Recession a few years ago. Well, Roubini predicted the collapse of the house market and the ensuing recession in 2005, thus missing half of the great bull market 2003-2007. Even worse, he has made many wrong projections since then, thus proving that it is only natural that some of the thousands of economists will correctly predict a recession once but no-one can predict recessions consistently.
The problem with human predictions is that they always suffer from the bias of recent events. In simple words, we always predict the last thing that occurred instead of predicting the next thing to come. For instance, after the market collapse in October, 1987 (30% in 3 weeks), everyone was so severely affected by the crash that predicted the total collapse of the economy as we knew it. What almost everyone missed was the fact that the collapse had already occurred and a great rally was beginning, leading to new all-time highs 2 years later. The history repeated itself 5 years ago. The Great Recession devastated so many people that many experts were calling the end of the world as we knew it and they are still expecting the collapse even today. However, the reality is that the collapse occurred 5 years ago and since then we have been enjoying the great recovery, with the S&P (NYSEARCA:SPY) almost tripling during that period.
The big picture
The truth is that the greatest bull markets come just after the worst recessions. After the 50% plunge in 1973, the market more than doubled in the next 6 years. Moreover, the S&P increased 7-fold from the crash of 1987 till its top in 2000. Even better, the history has shown that the market consolidates in a restricted zone for 10-20 years and then advances to new all-time highs without ever looking back thanks to the great technological achievements, which impart higher levels of prosperity to the new generations. The same seems to be happening now. The S&P and Dow Jones (NYSEARCA:DIA) have traded range-bound for 16 years, from 1997 to 2013, and they have recently recorded new all-time highs. As shown by history, they are probably in their first steps to advance to their next generational highs. I have described the concept in more detail in a previous article.
The great expansion
Another point that the scared investors may be missing is the second source of this bull market. While everyone has repeatedly heard that the Fed has strongly supported this bull market, I have hardly heard anyone saying that the other major source of this rally has been the strong expansion of the US companies abroad. Many large companies, such as Wal-Mart (NYSE:WMT), Coca-Cola (NYSE:KO), McDonald's (NYSE:MCD), Yum Brands (NYSE:YUM), General Mills (NYSE:GIS), Procter & Gamble (NYSE:PG), Johnson & Johnson (NYSE:JNJ), have reached a saturation point domestically but have been greatly expanding abroad, with great room remaining for future growth for most of them. It is very unfortunate to miss the great expansion of perfectly managed companies just waiting for a correction or the next bear market.
Waiting for a correction
The fact that there has not been a 10% correction in the market in the last 3 years despite the historical average of one correction every 1.5 years is not an important point to focus on. To be sure, the whole bull market 2003-2007 did not exhibit any correction from its beginning till the end. Moreover, as mentioned above, the market is completely unpredictable; a correction may occur any time, from next month till 5 years from now. Even a recession may show up any time but investors should not be obsessed with predicting it.
The important thing for investors is to focus on the big picture and select the stocks with the greatest growth potential, sound valuation and a strong balance sheet; where the index will go is irrelevant. This is the point of view of the most successful investors. The greatest stocks will advance even in the worst market. To be sure, one can check out the performance of Green Mountain Coffee Roasters (NASDAQ:GMCR), TJX Companies (NYSE:TJX) and Ross Stores (NASDAQ:ROST) during the Great Recession. These were high-growth stocks that ignored the market collapse.
Some other companies, such as Wal-Mart, McDonald's and Coca-Cola, performed equally well during the Great Recession but their stock diverged to the downside. However, as the stock price always follows the earnings in the long term, the divergence proved only temporary and the above stocks greatly advanced after the dust settled.
The cost of waiting
Finally, investors should keep in mind that it is costly to stay on the sidelines, waiting for a correction. First of all, they miss the dividend so they need a greater correction just to breakeven. They also miss the aggressive share repurchases, which result in significantly higher stock prices. Moreover, as the average historical market return is about 8%, they run the risk of missing significant capital appreciation while they wait on the sidelines. As the average duration of bull markets (31 months) is much longer than that of bear markets (10 months), the odds do not favor remaining on the sidelines.