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End of the Cycle

Author: Bob Williams

It’s one of those crystal ball questions every investor wants to know. Are we at the end of this investment cycle? In true Wall Street style, I’ll give you a qualified… maybe. You never know when a bull market will end until it has. And anyone who says they’ve done it before was either lucky then or lying now.

Many market prognosticators were predicting doom and gloom if Donald Trump were to somehow get elected president. Call me cynical but my guess is that a lot of them just saw the “if Trump is elected the market will crash” prediction as a cheap way to attract attention. Surely, if they were wrong no one would ever know since there wasn’t a snowball’s chance in Miami the guy could get elected, right? Oops. Since the election stocks have set record after record, at least to some degree because Trump is President (misguided as that may be). And with slow earnings growth – when there is some – market valuations just keep soaring heavenward.

Recession? Some thought it was imminent in 2016—now, not so much. Historically the U.S. economy averages a recession about every seven years. That means we’re a couple of years overdue and yet the economy continues to limp along at an annual growth rate of 1.5-2%. Certainly nothing to write home about, but oddly quite enough to keep the stock market on a tear.

What I’m about to tell you is certainly not scientific but in a behavioral economics kind of way it speaks volumes. I’ve been through more than one bull/bear cycle and I’ve seen people do the darndest things in the bull phase. A lot has changed since the onset of the last bear market but human nature isn’t one of them.

The market was on a tear from the middle to end of the 1990’s, pushed to astronomical heights by tech stocks. In the second half of 1999 my clients were saying, “Everybody’s making money with that tech stuff. Why don’t you put a lot of it in my portfolio?” Not some. A lot.

It was about that same time, one of my clients, an assistant manager of a home improvement store, decided to retire and pursue a career as a day trader. He took all the money he’d accumulated in his 401k over 20 years as seed money. He thought he couldn’t lose with the market doing so well. “It’s different this time!” In less than a year his seed money was gone and he was back to selling seeds at another home improvement store.

These commercials were in heavy rotation:

The market was on another tear in the mid-2000s. People were buying anything and everything because the barber gave them a hot tip he got from his brother-in-law, who heard it from the clerk at the convenience store, who overheard a phone conversation with a guy whose second cousin twice removed… You get the idea. And just when investors were buying things at the highest prices we’d ever seen, 2008 hit. Markets tanked. Banks were in trouble. And lots of people lost their shirt.

Now, as I review accounts with clients in 2017, I’m hearing more of them say, “I think I want to be more aggressive.” And all I can think is:

You need to think about worst case scenarios when choosing a portfolio. If you have 50% of your portfolio in stocks and the market drops 50% – as it did in both of the last two bear markets – your portfolio will lose 25% of its value. You might recoup some of that on the bond side but only if you don’t have any junk over there. Now take that 25% and figure out how much money that is, how many simoleons?

A $500,000 portfolio would be down $125k, your $500k now $375k. What do you think? Can you handle that and stick to your asset allocation strategy? In other words, if that happens can you rebalance and buy stocks after seeing them fall so far? Because that’s what “stick to your asset allocation strategy” really means. You can’t just ride it down and back up. That’s not a strategy; its paralysis.

Alhambra CEO Joe Calhoun says, “You never know a person’s true risk tolerance until the market goes down.” Most people are too bullish at the top and too bearish at the bottom. Just a refresher: your risk tolerance shouldn’t change with the market. At Alhambra, we use a strategic plan that is designed for consistency. The Fortress Portfolio is designed to provide a smoother ride than you get on the emotional roller coaster of less diversified portfolios. Hopefully, it will keep your risk tolerance on an even keel.

So, is this groundswell of investors who want to be more aggressive an omen of a declining cycle? I don’t know yet. But if you have a truly diversified portfolio and a real strategic investment plan, it really doesn’t much matter. Remember what 2008 felt like? It doesn’t have to be de ja vu all over again.

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For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: jyc3@alhambrapartners.com or 786-249-3773 or use our contact form.

This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Investments involve risk and you can lose money. Past investing and economic performance is not indicative of future performance. Alhambra Investment Partners, LLC expressly disclaims all liability in respect to actions taken based on all of the information in this writing. If an investor does not understand the risks associated with certain securities, he/she should seek the advice of an independent adviser.