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KFS Keeling Financial Strategies, Inc. |
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Always Darkest
"Doubt is not a pleasant condition, but certainty is an absurd one."
-Voltaire
Are you okay? You are probably getting your investment statements for the third quarter. While your accounts may have been up a little in September from where they ended August (as of this writing the August 25th low is still the low for the year) you are almost certainly down from where you started the summer. How great is that! All the media panic, especially if you watch CNBC, Bloomberg or Fox Business has been fantastic. Nothing gives me greater faith in a market turn around than talking heads screaming about how terrible everything is. More than that, we're not just talking about the market recovering from this recent downturn - but could we possibly, with all the seemingly awful things going on in the world, be nearing the end of the Secular Bear market?
We use lots of terms in the investment world that can be difficult to understand, even when those terms aren't technical. Bull and Bear seem pretty easy - Bull markets go up and Bear markets go down - and that is true. But we need to separate Bear and Bull markets that last for a few days or weeks from what we call Secular Bear and Secular Bull markets that last for several decades. A Secular Bull market is an extended time period when the markets outperform their long-term averages (let's use 10% as a proxy for that long term average) and a Secular Bear Market is when the reverse happens - it doesn't mean the markets have a negative return during a Secular Bear, in fact they don't, it just means they underperform that long-term average. The most well-known Secular Bear market was triggered by the crash of 1929 and corresponding start of the Great Depression. Now there are economic historians out there that will calculate exactly when these things started and ended, but for simplicity sake I'm going to use a broader brush. So from 1929-1948 the U.S. stock market as represented by the S&P 500 averaged 3.1%. There were up years in there, from 1942 - 1945 the markets went up by over 25% per year (kind of like 2012-2014?) but by and large for 19 years the markets underperformed those long term averages. Starting in 1949 and running through 1968 the markets averaged 14.9% - about 50% above that long-term average. Looking back we all understand that this was the great post-war expansion, but living in the world in 1949 how likely would this scenario have been? The Red Scare was in full swing, the most populated country on earth - China - fell to Communism in October of 1949 coming only two months after the U.S.S.R.'s first successful nuclear weapons test. The investment experience of everybody under the age of 50 was that stocks don't make much money. We were living in economic and political fear.
Coming on the heels of the great post-war expansion was the '70's malaise. From 1969 - 1979 large company U.S. stocks averaged only 4.5%. What made this even worse was the high inflation environment at the time - adjusted for inflation these same stocks actually had a negative return of almost 2%. Even during the depression / WWII era the stock markets had a positive return after inflation. In 1979 all seemed particularly lost. That February the Shah of Iran was deposed and the current theocratic government took over Iran, as we all know later that year in November the U.S. Embassy was stormed and American hostages began their more than a year of captivity. The Soviet Union invaded Afghanistan in December increasing fears of Soviet expansion into Central Asia and all that coming during the third year in a row where inflation had run at about 10%. It was on the 12th of August that Business Week (remember magazines?) ran its famous cover where it declared "The Death of Equities" and why high inflation would kill stock returns during the 1980's. What happened was quite the opposite, for the next twenty years, from 1980-1999 the S&P 500 averaged 17.9% per year. Once again there were bad years in there, 1987, 1990, 1994, but the overall trend for twenty straight years was up and up far more than the averages. In fact making money in the markets had become so obvious and so easy that we started to get a little cocky about it. In the summer of 1999 the book, "Dow 36,000" written by James Glassman and Kevin Hassett was published and predicted a 300% increase in large cap U.S. stocks over the coming decade - not quite.
What happened next is the Secular Bear Market we've all been living in since 1999. From 2000 - 2014, a full 15 years, the stock markets measured by the S&P 500 have averaged 4.2%. Seeing as how the S&P is down a little over 2% so far this year it's unlikely that average is going to be much better once 2015 comes to a close. That means we're basically 16 years into a Secular Bear market and Secular Bear markets tend to average 10-20 years in length. Isn't that great? If the past is any guide, and it's the only one we've got, then we have to be closer to the end of this Secular Bear Market than at the beginning, don't we? I know I've sounded pessimistic since the market bounce back in 2009 even as U.S. stocks did very well 2012-2014 and the reason for that was the financial crisis was just too big to be totally dismissed in only a couple of years. But I might be changing my tune. Sure the news would have to you think that's impossible, China's economy is slowing, Europe's is a mess, we have growing military threats all over the world - but trust me this is all child's play compared to having the entire Soviet nuclear arsenal hanging over your head every day. By and large living conditions are better and our country is safer today than it was at the end of the last two Secular Bear markets and the fact that we as a people and even more notably the media can't see that is all the more reason to believe it's true.
I don't know that this Secular Bear market is over; you only know those things in retrospect. I've also been harping on the S&P 500 quite a bit, while a diversified portfolio exposes you to many different types of assets that operate on different cycles. International stocks, especially emerging markets, small cap stocks and even bonds outperformed the S&P 500 over the last fifteen years. By adding those diversifiers to your portfolio you could and should have had returns in excess of that S&P 500 return - but still probably short of that 10% long-term average. Those same diversifiers made your portfolio returns look anemic next to the S&P 500 in 2013 & 2014 - but there's a reason for diversification because as Voltaire so beautifully put it, certainty is absurd. So here we are in the third month of the biggest market selloff in four years and to quote that other famous philosopher James Brown - "I feel good." I've spent three quarters of my career in a Secular Bear Market, cursing at how easy it was for my fellow advisors in the '80s & '90's watching their clients' portfolios exceed projected returns year after year. But I remain optimistic; I trust the forces of capitalism and understand that while the markets tend to go up over time, those upswings happen in cycles. The key to taking advantage of those cycles is to be invested when they start - I give the next up cycle permission to start now.
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Irony
We are still looking for new clients. People just like you who want their investment portfolios to make sense for their lifestyle; who want to have some certainty about what they can spend in their retirement; who want to avoid the big mistakes. During a market downturn like the one we've just experienced can be the best time to find those new clients. People suddenly become concerned about their financial future - they hear the reports of falling stock markets leading the nightly news (the bounce-back recoveries never lead) and wonder if they're on track to meet their future goals. Ironically that is also when we need to spend the most time with our current clients, reassuring them about their financial plans and making sure their investments are still positioned to meet their long-term goals.
So we're asking for your help. The recent sell-offs often get people talking to each other about whether or not they're on the right track. Anyone who doesn't know the answer needs help from somebody who can help them figure it out. Then there are the other transition moments when people are often also looking for financial advice; A job change, a relocation, a divorce, an inheritance, retirement or the death of a spouse all trigger the need to not just formulate a financial plan, but reassess any plans you might have already developed. So please send people our way - we don't bite. And don't worry if they don't have enough money, or they're not the right kind of people, or you're not sure if they're working with someone - let us figure that out. Thank you very much in advance.
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Matthew H. Keeling, CFP®
Keeling Financial Strategies
759 Falmouth Road, Unit 2
Mashpee, MA 02649 508-539-0900 Securities and Advisory Services offered through Commonwealth Financial Network, Member FINRA / SIPC, A Registered Investment Advisor
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All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indicies do not incur management fees, charges or expenses. Past performance does not guarantee future results. Forward -looking statements are not guarantees foo future performance and involve certain risks and uncertainties which are difficult to predict. Commonwealth does not provide legal or tax advice. Please consult with a legal or tax professional regarding your individual situation.
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