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I’m as guilty as anyone in focusing in short term news and market movements, looking to see if I should be making any changes in the portfolios. In fact, I’m always looking to play “small ball” by hitting singles, rather than swinging for the fences. I do operate under the premise that the way to get outperformance is by little tweaks, rather than picking that one winner.
Equities move on any number of reasons…some make sense and some do not. The job of the portfolio manager is to look at moves in individual securities and attempt to determine if these moves make sense for the long-term. For example, a stock either pops or gets punished on earnings. Was this move based on something that will affect the growth to earnings moving forward, or is it that the numbers didn’t meet the expectations of the analysts? Each of these scenarios are very different and need to treated as such….or do they??
Without doubt the number one question I’m getting asked this year, after such a great recovery from March 23, 2020 is “how much longer can this market continue to climb higher before the next crash?” It’s a fair question and one to which NOONE has the answer. And yes, at some stage there will be another bear market/recession, and fear in the market that washes out all those investors that operate without discipline. My answer to this question is the same today as it was in 2012, 2013, 2014, 2015, 2016, 2017…..you get the gist. We are in the middle of a multi-year bull run that potentially has years left to run. That does not mean the market will never retreat. It will, and it will feel like crap when it does. But this should never move you away from the discipline.
I only need to show one chart to emphasize my point. I’ve used it in every presentation I have done, and will likely use the same chart for the rest of my career.
Longer term, the market (as identified above by the S&P 500), has averaged 10-15 years of flat returns, followed by an average of two decades of substantial increase. This current cycle we are in began in 2013, when we hit all-time highs after the tech crash of 2000, as well as the Financial Crisis. This potentially means we are in year 8 of what could be a 20-year bull market. Although the crashes in 2000 & 2008 were for very different reasons, they both can be attributed to the expectations earnings would be affected. Ahhh… It all comes back to earnings!
Granted this is a very simplistic way of looking at things, but I heard a great quote a long time ago that has stuck with me through today, “The market seldom repeats, but it often rhymes”.
Today, we have gone through (and are now going through again) a pandemic. The market took a quick dive when uncertainty was here around how we would get out of this mess, and last year earnings were affected year over year by 22%. This year, just based on what we have seen reported so far as well as expectations for the remainder of the year, we are at 56%. And that number is climbing higher.
Mick Graham, CPM®, AIF®
Branch Manager/Financial Advisor at Raymond James in Melbourne, FL
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