The stock market has had a breathtaking run over the past eight years. Since its low point in March 2009, when the S&P 500 hovered around 686, the market has gone up over 250%. Investors who rode out the bear market of 2007-2009 now have larger portfolios than before the financial crisis. Even better, physicians who finished residency in 2008-2009 have been investing into a rapidly rising market.
But one day, this bull market will end. What should investors be doing with their money right now, given that the S&P 500 is at an all-time high?
Why (Some People) Think The Bull Market Is Over
Eight years is a long time without a major correction
It’s easy to be pessimistic about the stock market right now. The stock market has gone up so much, so fast, with few “corrections” for traders to catch their breath and “buy into dips.” The stock market just goes up and up, making record high after record high.
Many investors believe the market to be mean-reverting. As the market rises, it becomes predisposed to falling in the future. I don’t know whether mean reversion occurs in the stock market. However, given that momentum is often cited as a good fourth factor to include with the famous Fama-French three-factor model, I’m not so sure that investors should rely on mean-reversion to call market tops.
Valuations are stretched
With such a long bull market, the price to earnings (P/E) ratios of stocks have been steadily rising. The cyclically-adjusted P/E (CAPE), also known as the Shiller P/E ratio, is currently at 30, which is much higher than its historical average. Some market observers, including Robert Shiller himself, argue that you should pull money out of the market because of the high current valuations.
Donald Trump will tank the economy
Our current president is a polarizing figure, to put it lightly. He is adored by some Americans and reviled by others. When he was elected, global markets panicked, worried that his policies could bring economic and geopolitical uncertainty. However, once there was a belief that a Republican administration would pass pro-business policies, the stock market rallied. With his agenda currently stalled, it’s hard to tell whether he will be able to pass substantial economic legislation in the near future.
Nevertheless, Donald Trump in the White House makes many investors uneasy about putting money in the stock market, especially if you did not vote for him.
The Trouble With Calling Bull Market Tops
The problem with calling market tops is that predictions are easy to make. Most of the time, these predictions are quickly forgotten. However, when you actually look back on these predictions, they are usually a mixed bag. When you get a big market call right, though, as hedge fund manager David Tepper did in 2010, you can get a lot of publicity from the financial media.
However, even the best hedge fund managers can make really bad market calls. David Tepper, after making a great bullish call in 2010, told investors to not “be so frickin’ long” in 2014 and thought 2015 was a good time to take money off the table. Needless to say, investors who followed his advice missed out on the significant gains the S&P 500 has made since 2014.
Hedge funds have been hurt the most by the recent stock market rally. Given their reticence to buy and hold, they have missed out on much of the current stock market rally. They returned a paltry 1.7% from 2011-2016, far behind the S&P 500’s performance. When they charge 2% of assets under management, and 20% of profits, it’s no surprise that investors are fleeing from hedge funds and actively managed mutual funds into index funds.
What Should You Do Now?
If you have money on the sidelines, or you are continuing to save money, I encourage you to continue putting money into the stock market. While the bull market may end this year, it may not end for another 5 or 10 years, and we may never see these levels in the S&P 500 ever again.
After all, the bull market of the 1980s and 1990s lasted 18 years, from 1982-2000. If you stopped putting money in the market in 1990, eight years into that bull market (when the S&P 500 was at was trading at 350), then you would have missed out on an over 4-fold increase in the S&P 500 during the 1990s. The S&P 500 has never traded at 350 since 1990, and likely never will.
The bull market may indeed be over. I’m sure many readers will say “I told you so” if Donald Trump drives the U.S. economy into recession or the Case-Shiller P/E Index is correct in calling this market overvalued.
But I’m fully invested, and will be fully invested through the upcoming recession, whether it happens this year, in 10 years, or in 25 years.
What do you think? Do you think the market is overvalued? Are you fully invested, or have you taken some money off the table for the upcoming recession?