Sunday, March 9, 2014

Happy Birthday To Us, Happy Birthday . . .

It is hard to believe but it has been five years since the ugly days of March 9, 2009 when the stock market finally bottomed out, following a horrendous 57% drop.  Since then, the market is up almost 180% -- an object lesson to never panic nor to get 100% out of the market.

However, because Wall Street climbs a "wall of worry" everyday, there is now much clucking that we are due for another bear market, which is defined as a 20% drop.  I don't think that is likely, unless we fail to get a routine correction, which is defined as a 10% and is actually quite healthy for the stock market.  We NEED a correction.

On average, the average bull market is slightly under four years, suggesting we are overdue, but some bull markets have lasted almost ten years, like the 1990s.  Sam Stovall of Standard & Poor's said it best:  "age alone doesn't kill a bull."

Bull markets die because of recessions, bad monetary policy, over-pricing, or external shocks.  Recessions bother me the least, because they are fairly easy to foresee.  Bad monetary policy doesn't bother me either, as the Fed is committed to merely taper the growth of its quantitative easing program without actually reducing their holdings.  Plus, any rate increase will be minimal and probably not before the end of this year.  Over-pricing of stocks is a constant concern but doesn't appear worrisome yet.  The price-earnings ratio of the S&P got as high as 28.2 before the 1999 correction.  At the peak in 2007, it got up to 17, which is about where it is now.  So, stocks are high but not seriously high.  However, I do worry about some external event, often called a "black swan" event.  Commonly cited examples would be the fall of Lehman Brothers in 2008.  Some fret about a sudden collapse of the credit bubble in China.  I worry about a derivatives blow-up, where literally trillions of dollars become due overnight.  Of course, a black swan event cannot, by definition, be forecast.  We can only watch for it and sell quickly if we suspect such an event.

So, for now, sing Happy Birthday off-key, wear a silly hat, eat some cholesterol cake and count your blessings!