“Bull markets don’t die of old age”

When will this bull market end?  No one knows.  Bull markets can last for years beyond expectation and reason.  March 9, 2017 marked the eighth year of the current bull market in the U.S.  Bull markets in the past have ranged from 2.5 to 15 years with the average bull market lasting 8.9 years.  There are many positives in the U.S. today that can continue to support the stock market.  The economy continues to grow albeit at a slow pace, labor markets are healthy and company earnings are solid.  As a result, the much anticipated and debated rise in interest rates has begun, confirming the Federal Reserve’s belief the economy is healthy.

Investors today are anticipating the Trump administration’s policies such as corporate tax reform, deregulation, and major infrastructure spending getting passed through Congress.  The market believes the economy and company earnings should benefit nicely from these business friendly policies and this is reflected in the higher valuations we are currently seeing in the U.S. market.  While valuations are high, they are not at extreme levels from a historical perspective.  However, the longer it takes to pass these policies, the more questions investors will have.  This will result in more uncertainty and volatility in the stock market.

High valuations are never the reason for a bear market to begin.  Expensive markets can stay expensive for years without a major market correction.  Historically, wars, recessions, and major policy errors have been some of the trigger events for bear markets, not valuations.  Higher valuations can, however, impact the velocity of bear markets when they inevitably occur.  Markets quickly reprice stocks, fear permeates the market, and valuations return to more normalized levels.  We do not know when this bull market will end or what the trigger event will be, but we have to acknowledge the incredible run the U.S. stock market has been on.  Over the past eight years, the U.S. has significantly outperformed international and emerging markets.  Markets are cyclical and trends eventually reverse course. For more information on these cycles read our Market Insights:  http://www.waypointwp.com/insights/2016/9/14/why-diversify

What do we do now?  The prudent thing to do in any market cycle is to take gains where appropriate and redeploy these assets into areas that have underperformed.  While each client portfolio and situation is unique, for many clients, this means taking some profits from the U.S. and rebalancing into international and emerging markets equities or into global fixed income.  This will bring portfolios back in line with target weightings.  Due to the unknowns of the market and the inability to predict the future, it is important to maintain global stock exposure in portfolios and stay well diversified.  If the Trump administration is successful in passing the pro-growth policies, it is plausible for this bull market to continue for years to come.  Prudently taking profits in areas of the market that have risen and reallocating them to underperforming securities is disciplined portfolio management.   As always, we will diligently keep our focus on the after tax and after all cost benefit of making any changes to your portfolio.  Feel free to reach out with any questions. We hope you enjoy your spring!