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%.

As I said we don’t make predictions, BUT if you agree that a bear market will probably occur during the next decade (and that is the reason that could precipitate the low average returns) – how should you invest for this expected future?

If you were to choose to be a ‘buy and hold’ investor, then you will accept a decade with very little investment growth, perhaps none after inflation. You’ll get all of the upside as the current bull continues, and then all of the downside as well when the bull ends.  Hopefully you can hold thru the downturn and receive the eventual recovery. And, also hopefully, your time horizon is long enough to make up for those lost years. Most passive investors (I believe) are hoping that the next bear market is a long, long way away, but eventually it will have to be dealt with. Unfortunately hoping has nothing to do with what actually happens, and as Tony says ‘Hope is a lousy investment plan’.

On the other hand, if you choose to stay on the sidelines as long as the markets remain ‘overvalued’- you could be right, or you could be sitting on the sidelines for a long time. You may hope that the bear arrives soon so that you can take advantage of the buying opportunity. But again, hope is a lousy investment plan.  And what if the bull ranges for another ten years? Everyone around you will be bragging about their returns while you wait for an opportunity.

Tactical strategies (such as trend-following) that are willing to move to defensive positions in bear markets can provide a better solution. It is the one strategy we know of that can be used at any time of the market cycles and still achieve good results. If the bull continues for another year, or three, or six, trend following will allow for continued participation in some percentage of market upside. However, at the same time a trend following system provides protection against the inevitable drawdowns somewhere in the future. There is of course no magic formula. Trend following is subject to the back-and-forth action of choppy markets (take the Spring of 2019 for example!) The whipsaws can be frustrating- but unlike bear markets they are not usually devastating.

Today, as we are experiencing over a decade of bull market returns, I expect that someday this monster bull will end. If you, like we, think there will be another bear SOME TIME in your investing future, we believe trend-following could well be the single best approach to navigating that eventual bear. And the timing of the next bear is unknown to anyone.

Ron’s Market Minute – One Last Comment on 2019 (Maybe)

I would like to share one more thought about last year before moving back to checking the current trends. It is worth noting that 2019 was a somewhat remarkable year from many viewpoints. Yes, the financial markets started off with some quite scary bounces, but investors in the markets surely enjoyed the final numbers. In my opinion the Fed’s sudden about-face played a very important part in changing the markets from bear to bull. And of course, the trade deal contributed to the tallies. (And as usual the consumers certainly contributed to the super gains.) But bottom line I believe the real key to 2019 was to recognize that the magic ingredient was that it doesn’t pay (or at least rarely pays) to fight the FED.  With central bankers here, there, and everywhere around the world in an easy money status, traders knew the most likely ultimate answer. 

2019 was the type of year that reinforces the idea of using a flexible approach to building one’s portfolio. If you held a view that went against what the market was actually doing, and stuck to your views- you paid handsomely for holding those views. And that’s the reason we prefer to focus on Tom Dorsey’s slogan to ‘never invest according to what I think ‘should’ be happening, and instead always invest based on what ‘is’ happening. His saying goes, ‘It’s okay to be wrong, you just can’t stay wrong for long’.

Looking into 2020, while lots of Wall Streeters are talking about single-digit returns for stocks, I’m thinking there just might be some fireworks ahead — and perhaps in both directions.  But for now, I’m continuing to follow the track of the Bull train – while keeping risk-management tools handy. 

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) TheDenk
www.denkinvest.com

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw[@]denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation. Information in this commentary is the sole opinion of Denk Strategic Wealth Partners. Past performance is no guarantee of future returns. All market related investments involve various types of risk, which include but are not restricted to, credit risk, interest rate risk, volatility, going concern risk, and market risk.

The Update provides information of a general nature regarding legislative or other developments. None of the information contained herein is intended as legal advice or opinions relative to specific matters, facts, situations or issues. Additional facts, information or future developments may affect the subjects addressed in this document. You should consult with an attorney, accountant or DSWP planner about your particular circumstances before acting on any of this information because it may not be applicable to your situation.

Lincoln Financial Securities and Denk Strategic Wealth Partners and their representatives do not offer tax advice. Please see your tax professional regarding your individual needs.

*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.

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