Investors are on edge.
The major stock-market barometers – the Dow 30, the S&P 500, the NASDAQ Composite – are flat to down for the year. Price volatility has been a defining feature of daily trading. It feels as if markets could roll over at any moment.
Are investors on edge for good reason?
Morningstar data tell us that bull markets have lasted an average of 97 months – roughly eight years – over the past century. We’re entering the tenth year for the current bull market. The bull market is long-in-the-tooth if we go by the averages.
Perhaps we shouldn’t go by the averages. They can mislead.
From 1950 to 1956, the Dow ran to 500 from 200 to produce at a 16.5% average annual rate of appreciation. By the end of 1956, many investors were nervous.
A major correction surely loomed after such a strong run. Conventional wisdom said to sell and wait until a significantly lower price prevailed after the “inevitable” major correction.
So much for conventional wisdom.
Investors who sold in 1956 and waited for a significantly lower price are still waiting to this day. No major correction occurred that you can tether to 1956.
The S&P 500 is up 288% since March 2009. The advance is hardly alarming if you take the long view. It’s only the fourth-strongest advance on record. Three other bull markets moved higher, with one a quantum leap ahead of the rest: The 1987-to-2000 bull market saw the S&P 500 rise 580%. That bull market lasted nearly 13 years.
Ferocity of a Bear Market
To be sure, the bear that follows the bull can be ferocious. The good news is that investors can quickly recover from the mauling.
Unlike in the 1950s, the bear market that followed the 2002-2007 bull market produced a punishing pullback. The 2007-2009 bear market lasted roughly 18 months and scrubbed off 55% of the S&P 500’s value.
But within a year after the market bottom in March 2009, the S&P 500 advanced 71% from the bear-market low. A full recovery emerged in early 2013. It’s been mostly blue sky since.
That said, even when there is no major market correction, sub-market corrections pox-mark the landscape. An investing style or a business sector will fall out of favor
For example, REITs and other high-yield investments fell out of favor in 2015. A High Yield Wealth REIT favorite, Gladstone Commercial Corp. (NASDAQ: GOOD), was down, and down meaningfully. Gladstone Commercial shares were beat down 35% in that year. The beat-down in price lifted the dividend yield into double digits.
We suppose we could have avoided the indignity of a protracted beat-down with a stop loss. But why? We knew Gladstone Commercial’s dividend was secure. Had we had been stopped out, we would have missed the subsequent dividend payments.
What Really Works
More important, we would have missed the subsequent quick price recovery that occurred in 2016. Gladstone Commercial shares were up 35% in no time. How could we have possibly timed a return so brilliantly?
We couldn’t have, which is why we stick with what works – staying invested.
The current bull market will give way to a bear market. We could see another punishing market correction like the one in early 2007. Or, we could see an almost imperceptible market correction like the one that followed the 1957-1958 recession. (The Dow 30 lost 13% of its value, but in six months had recaptured all the lost ground. Within 18 months the Dow 30 was up 55%.)
We don’t know where the market will turn in the short term, but we know what works in the long term. That’s why we won’t risk being the investor waiting 60 years to return to the market, as the 1950s doleful investor waiting for the market to drop to 1950s levels.
If your dividends are secure, don’t worry. They’ll survive a bear market. More important, they’ll thrive afterwards. History is on our side.
— Steve Mauzy
Source: Wyatt Investment Research