What goes up must come down

June 30, 2017

The equity markets have been great to us over the past few years. We just past the anniversary for the eighth year of this bull market. With only a few stumbles this market has continued to grow. The question is… is it coming to an end?

Every day I am reading articles about how the market is now overpriced and ready to crash. In fact, even the great Nobel Prize winning economist and creator of the Cyclically Adjusted Price-Earnings (CAPE) ratio Robert Shiller has said that “the market is way overpriced’. What does that mean to us? Should we be selling?

It is true that all bull markets come to an end eventually and there are signals that the market is highly valued. Bull markets can keep growing though. Since 1926, the average S&P 500 Bull market period lasted 8.9 years with an average cumulative total return of 490%. This Bull Market started March 9, 2009 with the S&P 500 at 676.53 it is now at 2349.18 up 247%.

Price earnings ratios are high but not compared to 2000. Price earnings are now at a little over 23 but in 2002 the ratio got to 46. Those highs were with 5-6% interest rates not the low interest rates we are dealing with now. The markets can keep on climbing much longer than we ever expect.

Warren Buffett recently was quoted as saying, “US stocks could go down 20% tomorrow, but we are not in ‘bubble territory’ now”. This quote speaks to the fact that the markets can and will be volatile regardless of valuation.

So what do we do?

We need to stay invested and enjoy these returns but always be ready for the inevitable pull back. We need to be prepared and not surprised at the down times when they come. Stick to our plans and always remember that the average Bull Market lasts 8.9 years with an average return of 490% and the average Bear Market lasts 1.3 years with an average cumulative loss of -41%. The good years outweigh the bad.