Evaluating the Aging Bull

After eight years of strong returns, is it time to consider selling U.S. stocks?

Periods of strong returns make many investors nervous. Through 2017, we documented the extended periods of gains in the major market indexes without interruptions by significant declines. These periods without declines are at or near record lengths. The S&P 500, for example, is in the midst of its second-longest period without at least a 20% decline.

Is this a sign you should sell U.S. stocks or at least significantly trim your position?

I think back to the late 1990s. The major indexes eventually had three successive years of gains of 20% or higher. That hadn’t happened before. After the first year of 20% gains, a number of analysts said to sell stocks. After the second year, the chorus of people urging sales grew because the indexes hadn’t before recorded more than two consecutive years of gains exceeding 20%. Yet, the third year of 20%-plus returns happened.

Bull markets don’t die of old age. Also, the fact that something hasn’t happened before doesn’t mean it won’t happen. A careful reading of the data indicates that there’s not a strong correlation between one year’s returns and the next year’s returns. Each year has to be looked at in context of the current economy, market fundamentals and trends.

There’s no sign of a recession. In fact, the economic data have been full of positive surprises the last few months. That indicates economic growth is increasing, not decreasing.

Market momentum also is strong. Whether you want to measure it using moving averages, the advance-decline ratio, or other factors, the trend is upward.

Once a market trend is established, whether up or down, it takes a lot to turn it. Even a decline of 10% or more (which historically is overdue) wouldn’t automatically end the positive intermediate and long-term momentum.

I don’t spend a lot of time on the technical market indicators, but I do look at them. Now, the ones that seem worth looking at don’t give reasons to sell stocks.

The U.S. markets will turn at some point, and most investors probably won’t see it coming. But a key mistake of many investors is to sell too soon. They don’t let their winners run and leave a lot of money off the table. You’ll earn higher returns in the long term if you plan to sell sometime after the top is reached than by trying to anticipate the top. A period of strong returns isn’t a reason by itself to sell.

The Data

There was only a small amount of data released in the last week, and it was very positive.

The PMI Manufacturing Index rose to 55.1 from 53.9. About the only negative in the report was slow growth in exports. Otherwise, it was strong across the board.

Likewise, the ISM Manufacturing Index rose to 59.7 from 58.2. New orders were at a 14-year high. In this report, which has been stronger than the PMI counterpart for a while, export orders are surging.

The service sector also is doing well. The PMI Service Index declined to 53.7 from 54.5. But the mid-month flash for the index was 52.4. So, the final reading indicates the sector surged in the last two weeks of the month. The ISM Non-Manufacturing Index will be released tomorrow.

New unemployment claims rose 3,000, and last week’s “no change” report was revised to a 2,000 increase in new claims. In other words, there isn’t much change in the labor market.

The ADP Employment Report found 250,000 new private sector jobs were created in December. That compared to 185,000 last month (revised down from an initial 190,000). That indicates tomorrow’s Employment Situation Reports should be strong.

The Markets

The S&P 500 returned another 1.18% for the week ended with Wednesday’s close. The Dow Jones Industrial Average increased 0.59%, while the Russell 2000 rose 0.61%. The All-Country World Index added 1.58% and emerging market equities soared 4.06%.

Long-term treasuries fell 0.54% for the week. Investment-grade bonds declined 0.42%. Treasury Inflation-Protected Securities (TIPS) rose 0.14% and high-yield bonds increased 0.68%.

The dollar, however, lost 0.74%.

Energy-based commodities returned 2.29% for the week. Broader-based commodities rose 1.99%, while gold climbed 2.10%.

Bob’s News & Updates

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