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The Bull Market Is Over (Or Is It?)

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.

Eight years into the 1982-2000 bull market, the S&P 500 traded around 350. You’ll probably never see the S&P 500 at 350 ever again. (Chart courtesy of StockCharts.com)

Conclusion

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?

33 thoughts to “The Bull Market Is Over (Or Is It?)”

  1. Excellent post. I try to not think of the market in terms of over or undervalued. Thinking that way is counter productive. I think of it in terms of where I should shift my asset allocations. If international is lagging domestic, that’s an opportunity to invest in a lagging asset class.
    It’s all psychological but at least I feel like I’m doing something to help which is what I think most of us would like to do.
    What we should really be doing is getting out of our own ways and letting the market return what it will and hop on for the ride.

    Tom @ HIP

    1. Rebalancing is a kind of market timing in a sense, as you tend to buy falling asset classes and sell rising asset classes. I don’t think it’s necessarily better or worse, but it does enable you to keep your portfolio within your risk tolerance.

      1. Is rebalancing market timing or valuation approach? In otherwords, every approach IMHO opinion is market timing, it just depends on your time horizon.

  2. I buy and forget. I have not actually watched the flow of the market in about 6 months. It is not going to change my investments so why waste the mental energy. It will be interesting to see where we end up in 3.5 years (can you believe 6 months have already passed in the new presidency).

  3. I just think of each dollar invested with dollar cost averaging. Some dollars are gonna work real hard and make me more money. Others are gonna take a few years off and perhaps be a liability.

    Over time, most of my dollars will be pulling more than their fair share.

    1. Hopefully, the typical physician employs a psuedo-dollar cost averaging approach to investing, as they invest a portion of each paycheck (i.e. savings) into the market. This could be at market highs or during market corrections.

  4. Like almost every investment decision, time horizon is, perhaps, the most important factor. If you’re 25, you ought not even read this particular post. If you’re 65, you’ve probably already taken some money off the table.

    1. Absolutely — your asset allocation will change (i.e. become more conservative) as you get older. Hopefully, the allocation is a function of your age / risk tolerance as opposed to the current state of the market (bull market, bear market, etc.).

  5. The only thing I have done that approaches market timing is perpetually keeping about $30k in cash, such that I can make a purchase of stock index mutual funds on a “really bad day”—which I arbitrarily define as a drop of more than 2%. I will then purchase some mutual funds, and in the future replenish my cash savings with money that was otherwise earmarked for investments.

    Otherwise, as DDD says, I buy, hold, and forget.

    1. Finally, I have met one who BTFDers. Nice to meet you. Right now, that approach is working great. However, the only thing I have against 2% being a really bad day is that 20 or 30 years ago 1-2% was considered just intraday variablity. As a counterpoint, I recommend Taleb’s incerto series especially Antifragile.

  6. If you are a VTSAX investor like J. Money, Mr. Money Mustache, JL Collins, Mike and Lauren, ThriftyGal, etc… I love that simple strategy, but at a time like this when the market is so high, I would diversify 75% VTSAX, and 25% gold. Gold did great during the 2008 recession, I expect it will do well again during the next recession when it comes. What do you all think?

      1. It depends on when you bought gold. If you bought it in 2000, compared to the stock market you still made 2-3x more even though gold has been in a bear market for ~6 years. But, the point of gold is not to make more money, it is a storage of wealth as has been proven for 1000s of years. And, IMHO, there is a benefit to investing in things that retain their purchasing power. I would also distinguish between the “paper” gold market where you are exposed only to the price volatility of gold vs. the “physical” gold market where you actually benefit from it’s storage of wealth. If you really want to be exposed to gold and have a return, then put some money into miners. They will still be at risk of tanking if the market falls (likely due to decreasing credit) but will rebound with increasing gold prices. They were one of the few sectors that weathered the 1930s well.

        And, as a counterpoint with potentially missing out on a bull market that would last for another 10 years. If the market continues to appreciate higher, it will be increasingly more due to nominal and not real gains and in that case gold will likely rise as well.

  7. Great post and I enjoyed the comparison with the 1982 to 2000 bull market. Excellent point that you would have missed out on a decade of growth if you’d stopped investing into stocks 8 years into that bull market.

    1. Thanks. While the stock market is cyclical and has bull markets followed by bear markets, the exact length of each cannot be determined. Sometimes it’s just 5 years (2002-2007) and sometimes it is 18 years (1982-2000).

  8. Thanks for your post. I have taken the majority of my investments off the table (~60% cash equivalents at this point), 15-20% tangible assets, 10% miners, 10% TIPS; not including debt free residence which is another 50% of total). I think most metrics (not just CAPE) show the market at the highest or second highest (at this point) valuation in history. At this level, markets have historically corrected >/=50%. Granted, my assumption is that we will have a deflationary event (which there are many indicators for). But I am hedged for either a deflationary or inflationary event despite the limitations of certain accounts. However, if my hypothesis is wrong, and we tend to an inflationary environment due to a monetary revaluation or other I may take an initial hit before being back in. Either way, I will move back into equities at some point but not now. I will primarily wait and see. And, this approach has garnered a lot of criticism on other sites but as Baruch has said, “I made my money by selling too soon.”

  9. Couldn’t agree more to stay in the market. If you’re getting an itchy trigger finger then rediversify to a portfolio with more stability should a downturn pop up suddenly.

    If you called the “top” two years ago and switched to cash you’d have missed out on a 16% rise in the S&P 500. In a higher risk portfolio those gains are probably easily in the 20 – 30% range. Knowing that I feel a lot more comfortable weathering a sudden 5 – 10% downturn that may happen today or may happen in 3 years.

    1. You may be right because I can see the validity of arguments for a “blow off top” as described by Mises. But, I also see validity to the opposite scenario, a “Minsky moment.” At the end of the day, who know how this will play out. For me, if history is any guide, then one should expect a minimum of a 50% decline and at least 10 years for the market to recover to nominal levels. I had some pretty reasonable gains up until I cashed out in the 3Q16. I will be honest, I have missed out on ~10% gains so far based on my asset allocation but I haven’t lost any money. But, based on the data I see, I will continue to wait while watching for changes in data that refute my hypothesis.

      My biggest question for those arguing a buy and hold approach: Can you stomach a 50% decline in equities? And if your response involves having a bond allocation to weather these losses. My follow up question is can you stomach a situation where bonds and equities decline together? As Chris Cole of Artemis Capital has demonstrated with 200 y of data (albeit I only trust data post ~1929), equities and fixed income were strongly anti-correlated only 11% of the time (most of that was during the last 30 years). By contrast, equities and fixed income were strongly correlated 54% of the time. Remember we are at the second (or first) highest valuation of the stock market on record, and the highest valuation in the bond market on record.

      1. While the stock market and bond market may be more strongly correlated in certain circumstances, the volatility of the bond market on an absolute basis is less than that of the stock market. You are unlikely to get a 50% drop in the total bond market like you would with the total stock market.

        1. Thanks for the response. I’ll take my sunny side/glass half full/optimistic approach and respectfully disagree. IMHO, it all depends on how you are invested in bonds. If short term notes (i.e. < 3 year duration), most likely you wont see a 50% drop. But right now, you probably won't beat inflation either. But if you were invested in a total bond fund like Vanguard's with an ~8 year duration, I could see a scenario where it has 50% drop. Basically, rates would have to rise about 600 bp for this to happen. Yes, it's very unlikely BUT, a 400 bp rise in rates would put the 10y UST (currently ~2.3%) back at its long term average. 40y ago in the 1970 (~1977-82) 10y UST rates rose 700 bp (7% to 14%). Granted you would likely need loss of the dollar as reserve or a nominal UST default or monetary event or maybe even a debt showdown (which will occur before Oct) for this to happen but from my standpoint it is possible. And given the risk parity state of the market, rising interest rates could be bad for both bonds and stocks.

          The other thing about the bond market that I don't have a good answer for now is how liquidity mismatch risks inherent in bond funds will ultimately affect the price if a rising interest rate environment were to occur. Bonds are inherently illiquid. If there starts to be a selloff in bonds, how will price of these total bond funds react if they can't keep up with selling their underlying assets.

  10. Were staying the course and putting money into the market. I started saving in residency and the Great Recession hit during my training. We saw our $20,000 portfolio go down to $10,000. I thought, oh well, I’ll make up for it later. We did of course. However, 50% of our current net worth will hurt on paper. I don’t know how that will feel to be honest. So I plan on increasing bonds to 20% over the next 1-2 years then steady up from there.

    1. A 100% stock portfolio has worked well the past 8 years, but I think many younger investors don’t truly realize how painful a 50% drop in the stock market can feel. Looks like you were able to get that feeling of a market crash while the “lesson” was still cheap.

  11. I have been slightly re-evaluating my risk tolerance recently. I’m not sure if this is a good idea, but I have a different asset allocation in my retirement accounts compared to my taxable account.

    For my retirement accounts (401k, Roth IRA, HSA), I am heavily invested in equities (90%+). A 50% correction in my retirement accounts right now is really inconsequential since I won’t be accessing that money for 25+ years.

    In comparison, I may need the funds in my taxable account in 5-10 years (to purchase real estate for example), so I ratcheted down to around 70% equities and 30% bonds. At this equity percentage, A 50% equity correction would “only” result in around a 35% drop in the taxable account value, which would be more palatable.

    1. Certainly it’s reasonable to be more aggressive in accounts where you plan to withdraw money later. I like to think in terms of havkngone giant “pot” of money that will be withdrawn at various stages of my life. Then I only have to keep track of one asset allocation.

  12. Great analysis. We have an asset allocation that we are comfortable with. Our plan is to dollar cost average new money into our accounts twice per month. If a major correction occurs, we will rebalance and keep adding until we reach FIRE.

  13. I don’t really even like the “over” line of thinking. Sure we have corrections every few years on average, and we’re due for one, but then the market will continue it’s upward trend. Always has and always will. If it ever stops that means the entire economy has stopped growing and we’ll all likely have bigger problems than our stock growth. :-/

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