“Over the years I have seen scores of very bright investment advisors turn into
hugely successful gurus who blaze into the investment business with spectacular forecasts.
Yet, I’ve watched each and every one of them crash back to earth when a big subsequent forecast inevitably proved wrong.”
– Ned Davis
Founder of Ned Davis Research
In 1965, Gordon Moore, co-founder of Intel, predicted that the number of transistors on integrated circuits would double every two years. This is the basis of “Moore’s law,” and it’s why we currently have pocket-sized devices that are more powerful than 1980s supercomputers that took up entire rooms.
Computer chips continued to increase performance while decreasing in size, allowing for innovations that engineers never thought possible. Forty years ago, most people wouldn’t believe that we would soon have access to limitless information from the palm of your hand.
Most people are familiar with the word megabytes, but terabytes, gigabytes and petabytes? It’s easy to forget just how far we have come.
I was in New York City this past Monday. Ned Davis Research (NDR) and CMG have co-licensed the Ned Davis Research CMG U.S. Large Cap Long/Flat Index to VanEck. We were doing a video interview to explain the Index and process. You can find it explained in Trade Signals below. Anyway, Jan van Eck asked me, “What percentage of time has the market been in a bull market cycle versus a bear market cycle?” I answered, best guess, two-thirds of the time. But, frankly, I was unsure and a bit embarrassed I didn’t nail the answer.
Back in my office and a few quick clicks later, this is what I leaned:
Since January 31, 1900, the stock market was in a secular bull market just 54% of the time and in a secular bear market 46% of the time.
Following is a visual look at the data set. Here is how you read the chart:
- The chart shows the secular trends in U.S. stocks, bonds, and commodities.
- The top clip plots the monthly average of the S&P 500 along with a mode box that shows returns during secular bulls and bears.
- The middle clip plots the yields of long-term government bonds, which (for data geeks) are defined as prime corporate bonds prior to 1919 and Treasury bonds with a maturity of 10 years or more thereafter.
- The bottom clip plots the NDR Commodity Composite, which is constructed using prices provided by George F. Warren & Frank A. Pearson, Bureau of Labor Statistics and the Commodity Research Bureau.
- Shaded regions in each clip represent a secular bull period for that particular asset.
Notice the gain per annum of 13.8% during secular bull trends and -4.0% loss per annum during secular bear trends. Secular simply means long-term cycle vs. cyclical, which means short-term cycle. Note too, the gains and losses for bonds and commodities.
The next chart takes a look at the Dow Jones Industrial Average bull and bear market secular trends. This time, the return stats are sorted by cycle. I started my career at Merrill Lynch in February 1984. After the long 1966-1982 bear period, I can tell you nobody was interested in buying and holding stocks. Conventional wisdom was that you had to trade stocks to make money. My manager wanted me to sell the Merrill Lynch Basic Value Fund. It was a tough sell. Making 200 cold calls a day, I can tell you everyone I spoke with told me that “buy-and-hold” doesn’t work.
Few saw the bull market to come. Valuations were so low and forward return opportunity so high and with Treasury bonds yielding in the mid-teens, it was a beautiful set up for the 60-40 “buy-and-hold” mix. We are creatures of recent experience. Something the smart guys call “Recency Bias.”
As you can see in the next chart, the 1982-2000 equity bull market was pretty great. And the move since 2009 has been nothing short of spectacular; yet, who do you honestly know that was buying back then? It was pure panic.
Here’s the data:
One of the things that is easy for investors to lose sight of is the reality that both bull and bear markets exist. We know, behaviorally, it gets challenging for many investors after strong market periods and it is equally challenging after bear market corrections.
Kevin Malone from Greenrock Research visited me and my team this week. His firm partners with advisors and wealth managers, providing advice and an array of investment solutions. Before Kevin left he gave me a copy of a paper he wrote, “Think Twice.”
In 1998, the top 12 stocks contributed all the return of the S&P 500 Index. In other words, the S&P 500 was up 28.6% while the S&P 488 was flat. We thought that performance couldn’t be sustained until we saw what happened in 1999 when the total return of the S&P 500 came from the top 7 stocks.
Unfortunately, this is normal behavior after long rises in stock prices. The same phenomenon existed in the later 1960s and early 1970s with a group of stocks called the Nifty Fifty. These were supposed to be one-decision investments: one could safely hold them for decades. The problem was that 1973 and 1974 saw the Nifty Fifty fall more than the market, just as the top 12 and 7 stocks from 1998 and 1999 fell in the 2000-2002 period.
The poster child for this one-decision investing phenomenon in the 1998-1999 period was Microsoft, a great company. Our job, though, is not to identify great companies but great investments. If one bought Microsoft on the first trading day of 1998, the price was $16 per share and by the end of the next year, 1999, the price was $48. Investors were euphoric, but here is the problem. Microsoft peaked at the end of 1999 at $48 and one had to wait until September 30, 2015 to reach $48 again. That was 15 years and 9 months of no appreciation.
Today, the craze is FANG (Facebook, Amazon, Netflix and Google) stocks. And it looks like this:
Is it any wonder investors are crowding into these four stocks? Seems like periods past.
Ned Davis said, “Over the years I have seen scores of very bright investment advisors turn into hugely successful gurus who blaze into the investment business with spectacular forecasts. Yet, I’ve watched each and every one of them crash back to earth when a big subsequent forecast inevitably proved wrong.”
The reason I shared that intro quote is that all too often I see investors jump from one hot hand to another. My point is that I don’t believe that works