Given the market’s run, now 96 months and counting since bottoming in March of 2009, many investors are beginning to wonder if this bull is getting long in the tooth and if it will soon run out of steam.  Those investors who patiently waited have been amply rewarded from the pains inflicted during the great recession and have witnessed one of the great bull runs in history with the broad market (S&P 500) more than tripling over the past eight years.  

Before guessing when the next down-cycle will begin, one should consider a few questions: (1) how does this bull market compare in length to prior ones, (2) what are some of the conditions which create those inflection points that tilt the market from bullishness to bearishness, and (3) what does this mean to you as an investor?

Although this bull is not on the short-end in terms of duration, it is not the longest in recent history.  As the chart shows, since 1957 there have been two bull markets that exceeded the current one in duration. In the 1960s the market ran for 106 months before stalling out and then again in the 1990s, the mother of all bulls ran for a record 120 months before encountering a bear in 2000.

As the chart also shows, there have been nine recessions since 1957 and although not all lead to a bear market, each market downturn was preceded by, or concurrent with a recession.  So, what conclusions can we draw?

1. Just because a market has been going in one direction for any length of time doesn’t necessarily mean that it won’t continue in that direction.
    
2. In the short-run, stock prices will be greatly influenced by numerous variables, most of which are difficult, if not impossible to predict.  Examples include, Federal Reserve interest rate policy, inflation, GDP, oil prices and the outcome of presidential elections to name a few.  A large part of the current market’s upward bias is due to investor belief that anticipated lower taxes, reduced government regulations and higher spending will boost corporate earnings and resulting GDP (gross domestic product).
    
3. In the long-run, the single most significant factor that determines stock valuations is earnings. Think it through and it makes sense.  Any company will be worth only what someone is willing to pay for it and that price is a function of the buyer’s opinion about the long-term viability of and growth in earnings.  As a company grows its earnings, it usually pays a portion of those earnings out to shareholders in the form of dividends, retaining the rest for reinvestment back into the business for future growth.  On average, most companies will make more money this year than last year (with a few pauses for recessions) and over time their earnings and corresponding dividends will continue to increase, raising the value investors will pay for that rising stream of income.  It’s that simple.

Unfortunately, many investors aided by financial services professionals unnecessarily complicate this simple truism by trying to do two things that will put at risk this ingenious wealth creation engine called capitalism.  They try to time the market as this article addresses and risk making a huge mistake if they wind up on the wrong side.  Secondly, they try to beat the market to gain a little extra return, which history has shown is difficult, if not impossible to do consistently on a risk-adjusted basis. 

So, what is an investor to do?  The answer is simple: plan, execute, monitor and tweak as needed.  The market is going to do what it’s going to do.  No pundit or prognosticator from Wall Street to Main Street can consistently predict its near term direction and time spent in such an effort is time wasted. Intelligent investors develop a plan to pursue their goals and then get on with their lives.  Those plans aim for a reasonable probability of success but without unnecessary risk.  How much risk is too much? To answer that question, you might want to partner with an advisory firm that understands these various truisms and is more focused on your goal attainment, than trying to time or beat the market. 

Successful investing is very simple, but there is nothing about it that is easy.