January 31, 2020
Like most weekends, the first weekend of 2020 was the same for the Cutter home. After church, Maeve drove Phoebe and Sophie over to “Coffee ‘O” on Main Street to hang out with some school friends. I was told that Maeve is much “cooler” than me. So, I took advantage of having her home from school to help with the driving and decided to tackle a few needed chores around the house, and possibly catch a little football on TV later that day.
As I was working through my “to-do” list it occurred to me that as much as things stay the same, they also change. Football fans have spent a multitude of fall and winter weekends over the last fifty plus years knocking out household projects in the morning for the afternoon reward of settling into their recliner and watching the hometown team take on their rivals. The basic rules of the game haven’t changed much. A touchdown is still six points, the referees still make bad calls, and the best team is still the Super Bowl Champs. However, the way the game is played is vastly different. The players are much bigger and faster. The ball is flying all over the field and let’s not even talk about the salaries.
The same can be said for Phoebe and Sophie’s trip to the coffee shop. There has always been heated competition for the teenage dollar. How businesses compete for that dollar has changed and the successful businesses have adapted as needed to the fickle teenage consumer. The generation before me, it might have been malt shops and drive-ins. In my time we went to the mall to hang out with friends, but today it’s coffee shops.
Hmmm . . . I got thinking.
You know, I got thinking about how the financial markets are no different. Most of the fundamental aspects remain unchanged. Success is the reward for practicing strong planning fundamentals that must include risk adjusted rates of return with regular reviews. A key fundamental is being aware of the ongoing market rivalry of the Bulls versus the Bears. The Bulls with their eternally optimistic market view and the Bears telling us that there is danger around the next corner. We open our internet browser one day and somebody is predicting the Dow Jones will soar over 30,000. The next day someone who is claiming to have predicted the 2008 recession is telling us to bail out of the market. So, who should we believe?
With the rapid growth of the current Bull market in the last ten plus years, now is probably one those critical times to consider the Bull versus Bear rivalry. One of the key fundamentals is that the broad business cycle is exactly that – a cycle. Bull markets and Bear markets represent that cycle. Bull markets are usually far more durable and robust, but the smart financial plan is to be keenly aware that the next Bear market is destined to come.
To give you a little historical context: The bull versus bear battle has been decisively won by the bulls. From 1926 to 2017, there have been nine bull markets and eight bear markets. While there’s no assurance that history will repeat itself, bull markets have tended to run for much longer than bear markets, and their gains have – so far – outweighed the losses endured during bear markets. The average bull market has lasted for a full nine years, generating an average gain of 480 percent, according to First Trust. Bear markets, on the other hand, ran for an average of just 1.4 years, triggering average losses of 41 percent.
It’s important to note that, as of now, we are at ten plus years of bull market growth. While no one can say for sure the Bear market is truly around the next corner, a safe bet is that some sort of market correction is coming down the road. The question is, are you prepared.
You see, a key fundamental of the financial markets is that while they work to grow the economy, they also have no qualms about punishing irrational exuberance and re-directing capital to new trends and ideas. While predicting the market is incredibly difficult, it’s very important here folks, to be using quantitative data that helps define your risk adjusted rates of return to help give you the highest probability of financial success. The goal is to take advantage of those trends on the upside and potentially minimize the downward trends, preserving capital in times of stress. Remember Paul Krugman, who won the 2005 Nobel Prize for Economics in 1998 said, “By 2005 or so, it will become clear that the Internet’s impact on the economy will be no greater than the fax machine’s”.
Hmmm . . . I am glad I did not take his advice.
So, do I listen to the Bears and completely bail out the market? Maybe not so fast.
Remember, The Fed (Federal Reserve Bank) has a mandate to “referee” the economy, so to speak, through adjusting the money supply. The Fed is charged with attempting to maintain a relatively stable economy by adjusting interest rates to keep stable employment and economic growth around 2-3%. An entirely cash position in a time when The Fed is pushing down interest rates may mean locking in losses. Have you been to a Sears or a Kmart that’s anchoring a mall lately? Probably not. Bob Griese was the Superbowl winning quarterback in 1974 and only attempted seven passes. Will that happen again this year? Also, probably not. But you can’t necessarily sit on the sidelines if all the trends are heading north.
Folks, in the battle of the Bulls versus the Bears, the most important take away is to have a system in place that’s built on a philosophy of understanding risk, and using quantitative data. Data that just may guide us to make prudent adjustments to our investment strategy when the trends are not in our favor. It’s really not important whether the Bulls or the Bears win at any point in time. What’s important is that you have a solid system in place for whatever the outcome will be.
So as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at firstname.lastname@example.org.
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