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Weekly eLetter 2/14/2020 — I’m Hearing Bear Market Again

From the title, you might believe we are bearish on the markets. If, however, you’ve read some of my comments over the past 6 months you know we do not make forecasts or guesses on the direction of markets. We follow our rules-based trend-following models…period. So, although WE are not necessarily market bears, we do read headlines – and it seems that there are quite a few writers that seem to expect a bear market to happen sometime in the not-too-distant future. They may not specifically state that as a fact, but it seems so from their writings.

We see articles often suggesting future returns from the S&P500 Index over the next 5 to 10 years to be only 2 to 5%. Some of these articles are based on long-term averages, and usually state that when stock values are high (as they certainly are now), future returns are expected to be low. These writers imply that in order to have returns in the 2-5% range, there must be a bear-market crash during that time period. Why, you ask?

Well, the S&P Index rarely returns 2-5% a year (see chart), and it seems rather improbable that we’ll see ten consecutive years of returns in that range; therefore- they assume there must be a big BEAR to bring the averages down to that level. Perhaps there could be 9 good years, and one monster bear!

The chart below shows the annual returns of the S&P 500 since 1950 (70 years of data) sorted from the lowest return year (2008: -38.49%) to the highest (1954: +45.02%).

The blue box in the middle shows the years when the Index returned between 0 and 5%. You’ll note there were only 8 years out of the past 70 when the S&P actually had returns in that range- and note that none of them were consecutive. So, it seems doubtful that the next ten years could all fall in that range.  Note also the red horizontal line — that’s the simple average over these 70 years. Note the value of +9.14%.

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