Nobody Does It Better

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Includes: AAPL, AMZN, DIA, FB, GOOG, GOOGL, IVV, MSFT, QQQ, SPY, TSLA, VOO
by: Eric Parnell, CFA

Summary

We are on the brink of the longest bull market in history.  Or are we?

Why'd you have to be so good?

Lest we forget.

The problem with falling in love with Mr. Market or Mr. Bond.

Celebrate the longest bull market in history with a stainless steel portfolio strategy.

“Baby, you’re the best”

--Nobody Does It Better, Carly Simon, 1977

The U.S. stock market finally did it. Or did it? On Wednesday, August 22, the U.S. stock market as measured by the S&P 500 Index will become the longest bull market in history. Fantastic. Given how far we have come from the near destruction of the financial world so long ago now, what have we learned along the way to apply to the remainder of the journey that lies ahead?

“I wasn't lookin' but somehow you found me”

--Nobody Does It Better, Carly Simon, 1977

Is it really the longest? The recent buzz in the financial media about our beloved bull market assuming the mantle of longest in history come Wednesday at 2,383 trading days admittedly caught me a bit by surprise. This is not just because I view such distinctions as the S&P 500 Index crossing 3000 or Apple (NASDAQ:AAPL) reaching a $1 trillion market cap as largely trivial, but also because I have the bull market that closed out the last millennium lasting 3,110 trading days from December 4, 1987 to March 24, 2000.

I suppose this is because I view a -19% decline on the S&P 500 that was shorter than the shelf life of most perishable foods at just 63 trading days in 1990 from July 16 to October 11 as more of an unsettling blip than a full-blown bear market, but such is the subjectivity how we view markets over time. Further to this point, even if you use October 11, 1990 as your bull market starting point, today’s bull market would not be the longest until August 31 if you measured by trading days instead of calendar days.

Is it really the longest? Taking this one step further, today’s bull market really won’t officially be the longest come Wednesday without one final and important accomplishment. As of today, the official all-time high price on the S&P 500 Index took place more than 140 trading days ago on January 26, 2018.

While I would assign a very high probability that today’s S&P 500 Index in late August 2018 that stands a mere 16 S&P points away will eventually clear this hurdle and set a new peak, we should not overlook the fact that the current bull market record holder that ended on March 24, 2000 at 1527.46 came razor close at less than 7 S&P points to setting a new all-time high 113 trading days later on September 1, 2000 at 1520.77 before falling short and turning back lower for the next seven years. Put simply, no new all-time high today, no longest bull market in history when the folks at Guinness compile their future editions.

Even more on subjectivity. One final point to add. I often hear how the bull market from October 3, 1974 to November 28, 1980 was the third longest in history. This falls under the category of complete and total nonsense. See, we had this pesky thing called hyperinflation playing out in the U.S. economy at the time. So while this “bull” market in stocks may have been the third longest in history in nominal terms, investors in fact were dealing with a major bear market over much of this time period as evidenced by the monthly chart of the S&P 500 Index in real terms over this time period.

“History is moving pretty quickly these days, and the heroes and villains keep on changing parts.”

- Casino Royale, Ian Fleming, 1953

Why raise this point? Because stock bull markets are not necessarily reflective of awesome times. This wasn’t true from 1974 to 1980, and it’s not really true today. There is a reason that geopolitics is increasingly being overtaken by candidates from the far left and far right that are reflective of the collective frustrations of the voting masses around the world. Because as we stand at what is about to become the longest bull market in history, many around the world are feeling anything but awesome despite the repeated instructions of those in charge that claim everyone should be feeling otherwise.

So before we pop open the champagne to celebrate the longest bull market in history, let’s take a pause, maintain our sobriety, and keep our focus beyond the few high flying FAANG stocks on the bigger picture of persistently sluggish growth outside of the intermittent policy induced sugar highs, the still widening income and wealth disparity, mounting public and private debt, increasing protectionism and nationalism, and creeping social unrest that continues to accumulate around the globe.

“Nobody does it half as good as you”

- Nobody Does It Better, Carly Simon, 1977

Now, let’s celebrate. Regardless the run enjoyed by the S&P 500 Index over the past nine plus years has been remarkable. And it is still worth celebrating, particularly when remembering back like it was yesterday to how things were unfolding during that fateful overnight into the morning of October 8, 2008 when it truly appeared as though the financial system might actually implode. And one of the standout characteristics that has defined this tremendous run in U.S. stocks is that virtually no other market spanning the rest of the globe has done it even half as good as the U.S. stock market over this same time period. Remarkable indeed.

“And nobody does it better

Though sometimes I wish someone could

Nobody does it quite the way you do

Why'd you have to be so good?”

- Nobody Does It Better, Carly Simon, 1977

The tedious inevitability of an unloved season. Of course, another characteristic that has defined what is about to become by some measures the longest bull market in history is the fact that it is also widely regarded as the most hated bull market in history, which is a much more dubious distinction. But why were so many investors left wondering why U.S. stocks had to be so good?

Because this bull market has largely been the byproduct of artificial forces derived from zero to negative interest rates and ultra stimulative monetary policy that not only effectively forced investors of all risk tolerances to assume the added risk that came with investing in stocks in order to generate any reasonable return or income, but that these same untested policies also came with a significant potential for unintended consequences that could cause even greater problems down the road. And it is on this key latter point that we are now only entering the very beginning stages of finding out.

Lest we forget. Lest we forget that it was monetary policy that remained too accommodative for too long that helped result in the inflation and subsequent bursting of the technology bubble in the 1990s into the early 2000s. And lest we forget that it was monetary policy that remained too accommodative for too long that helped result in the inflation and subsequent bursting of the housing bubble throughout 2000s.

Monetary policy has been extraordinarily accommodative around the globe for an extraordinary long time in this current cycle, so it should be interesting to see what the other side of this mountain looks like once we finally crest the peak. In the meantime, celebrate, celebrate, and dance like Three Dog Night to the stock market music.

“I might as well ask if all those vodka martinis silenced the screams of all the men you've killed... or if you've found forgiveness in the arms of all those willing women for the dead ones you failed to protect.”

- Alex Trevelyan, Golden Eye, 1995

Lest we forget. Lest we forget that it was monetary policy that remained too accommodative for too long that helped result in the inflation and subsequent bursting of the technology bubble in the 1990s into the early 2000s. And lest we forget that it was monetary policy that remained too accommodative for too long that helped result in the inflation and subsequent bursting of the housing bubble throughout 2000s.

Monetary policy has been extraordinarily accommodative around the globe for an extraordinary long time in this current cycle, so it should be interesting to see what the other side of this mountain looks like once we finally crest the peak. In the meantime, celebrate, celebrate, and dance like Three Dog Night to the stock market music.

“There's some kind of magic inside you

That keeps me from runnin'

But just keep it comin'

How'd you learn to do the things you do?”

- Nobody Does It Better, Carly Simon, 1977

Here’s the problem with falling in love with James Bond. We have seen him in twenty-six movies and counting dating back over half a century. In these films, he has had intimate relationships with more than 50 female counterparts. And every time a new movie starts, the person with which he ended the last movie is nowhere to be seen as a whole new set of relationships are about to unfold. And the one time he did manage to get married way back when, she barely made it away from the wedding reception before she met her untimely demise.

In short, what makes him “magic” also makes him high risk, unpredictable, and potentially given to commitment issues. (What exactly happens between each movie? What is there to talk about in common after the exciting mission is over? Is there eventually an awkward break up? A mutual parting of ways? Hmm…).

"It's all right. It's quite all right, really. She's having a rest. We'll be going on soon. There's no hurry you see, we have all the time in the world."

- James Bond, On Her Majesty’s Secret Service, 1969

Here’s the problem with falling in love with the U.S. stock market. We have seen its performance dating back to the buttonwood tree. It has beguiled us over and over again with its impressive returns in the 226 years since. But it has also repeatedly broken investor hearts with its 28 bear markets (or more depending on how one officially measures a bear market) along the way. This includes three of the last five bear markets including the last two since the Fed got deeply involved in micromanaging asset prices where the value of the S&P 500 Index was effectively cut in half.

Indeed, today’s S&P 500 Index may be the longest bull market in history. Everything may feel awesome and that we have all the time in the world for this bull to continue to run. But we should never forget that the U.S. stock market by its fundamental nature is inherently high risk, unpredictable, and given to commitment issues.

For once Mister Market has finally moved on from the many dreamy eyed investors that still just keep on coming but eventually will find themselves running when it ends up being way too late in the midst of the next bear market, a whole new crop of investors will be waiting years after the eventual stock market bottom to get seduced and eventually fall in love with the next bull market.

Fortunately, a number of indicators remain supportive of further U.S. stock market gains at least for the time being, which suggests that we do indeed have more time for now. This includes volatility that has returned to its old subdued ways, high yield bond spreads that remain persistently tight, and bank lending standards that remain historically more generous, not to mention corporate earnings growth that remains robust albeit gradually deteriorating from peak forecast levels.

“Son of a gun”

- You’re So Vain, Carly Simon, 1972

The bear still awaits. The soon to be longest bull market in history may continue to run. But we also know for an unequivocal fact that it will eventually come to an end and that a new bear market awaits at some point in the future. And this next bear market is shaping up to potentially be a doozy, for the more asset prices are artificially inflated as evidenced by the valuation of the average S&P 500 Index stock currently residing in the 97th percentile of historical levels according to Goldman Sachs, the more unpleasant the subsequent unwinding process is likely to be once it finally starts to unfold.

What to watch. So how will we know when today’s bull market is finally coming to an end? Beyond the numerous economic and financial indicators that I monitor on a regular basis, the following are three straightforward readings to watch to determine whether the longest bull market in history is about to become no more.

First, technology stocks break. Break really hard and sustainably hard for that matter. I’m talking down -20%, -30% or more in relatively short order. And this includes the mega cap FAAMG stocks of Facebook (FB), Amazon (AMZN), Apple, Microsoft (MSFT) and Google (GOOG)(GOOGL) parent Alphabet. They make sense to be grouped together not because they are necessarily direct competitors of one another but because they are the high octane names that have propelled this market so far for so long. Today’s bull market does not die until these stocks finally break down.

Second, the Tesla (NASDAQ:TSLA) story ends. Apologies to the many Tesla believers out there, but what enables a company like this to maintain its stock price at current levels is speculation. And while the company may eventually induce its demise for idiosyncratic reasons at the end of the day, once the market demonstrates that it is no longer willing to support companies of this ilk at anywhere close to current prices, it will provide an important signal that speculative forces supporting today’s stock bull market are exiting with it.

Lastly, when the S&P 500 Index finally starts going down in a sustainable way, look at various individual stocks across different sectors. If everything is going down all at once, this is short-term liquidation pressures that are more likely to be quickly reversed. Instead, if the former bull market leaders (tech, FAAMGs) are unraveling along with a majority of the broader market at the same time that the minority of downtrodden and previously overlooked stocks in the S&P 500 are rising, this is more what a bear market looks like in its beginning stages. There is a time for stocks to wash out collectively, but this almost always comes in the later stages of bear markets, not at their beginnings.

“I'll buy you a delicatessen... of stainless steel!”

- Blofeld, For Your Eyes Only, 1981

Be prepared. So what actions should investors be taking in their portfolio in preparation for any future bear market? Absolutely none. For an investor should already have incorporated into their portfolio allocation strategy a blend of assets from various categories that not only complement and can rise independently of one another, but also can continue to move separately from one another in the event that any one or more categories in the group start to fall sharply.

Put more simply, if your strategy is already built with securities that can more than offset the losses that might befall the stock segment of your portfolio at any given point in time, then your portfolio requires no adjustment. This is particularly true if the specific companies that make up your stock allocation have been chosen specifically for their ability to weather relatively better any future bear market.

Enjoy. So celebrate what many are now regarding as the longest bull market in history. And if your portfolio is already prepared for whatever may follow from here, you can truly enjoy it for all it’s worth.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners and Retirement Sentinel makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners and Retirement Sentinel will be met.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long selected individual stocks as part of a broad asset allocation strategy.