After G20 meeting when stock indices are gapping up it’s very easy to lose sight. It’s as easy to get excited as it had been easy getting depressed two weeks ago. In this kind of environment one needs to keep perspective. Often the best way is to take a deep breath, zoom out and take a more long term view. Usually the longer you go in the past, the more you will understand the present and the easier you’ll prepare yourself for any possible outcome in the future.
So I would like to share with a longer term chart of the S&P 500 index dating back from 1900 to the present day.
While we have around 120 years worth of prices here one could argue this is still a fairly limited data set. A concern about such a limited history is that we cannot identify any longer cycles if there are ones. Say, there could be a 100 year up cycle followed by a 100 year down cycle where we’d be close to the peak of the former. Or there could be a 1000 years long cycle and we’re just in the middle of it. Who knows, so let’s work with what we have.
We see that the long term trend is clearly up. We can also identify that after the 1950s we saw two secular bull trends that lasted 20 odd years, two secular sideways (bear) trends that lasted 15 odd years, and possibly a third secular bull trend that started in 2013 and is still going. We also see that secular bull trends can have multiple cyclical corrections like secular sideways trends can have multiple cyclical rallies.
But what does all this mean for the markets going forward. The US stock markets is in a secular bull trend that’s 5 years old now. If previous secular bull markets are any tell we could still have 10-15 years of good times. We’ve seen a correction (and a mild recession) in 2015-16. Is it likely we see another one? You bet. Does it have to happen right now? Not necessarily. Does this secular trend have to last for another good decade or will it end sooner by a spectacular blow off top like we saw in 1929? Only time will tell.
While I do think we should be defensive right now I don’t think every correction or the next correction must end like 2008-09 or 1929-32 style crisis. Even if the markets correct by 20% or more, it does not necessarily mean we will get into a deep recession. We might, but it’s far from given!
Being cautious doesn’t mean we’re preparing for a full blown crisis. If it happens we’ve protected ourselves already, but if it doesn’t then most likely we won’t lose much of the upside. I really like an analogy I read on Steve Deppe’s blog “But the forecast is still cloudy with a chance of thunderstorms. While it’s not likely to storm, prudent long-term investors pack their umbrella”.
Keeping a perspective and an open mind matters.