THIS IS PART TWO OF A THREE PART SERIES

 

Is the Mindset of Today’s Investor Pessimistic?

Before we can discuss a positive longer term view, an evaluation of current and past market history is warranted.    I will use the S&P 500 as my term for “the market” as it is the benchmark for most professional managers.

From December 31st, 1999 through to the current first quarter 2016, the market has made very little progress.   I like to call periods like this a “Bear / Flat period”.   Based on my analysis, “Bear / Flat periods” have lasted between 15-21 years.  Most in my analysis are near the shorter end of the spectrum. They generally occur after significant long-term Bull Markets with the most recent one experienced from 1982-1999.  

Conventionally the media focuses on how we have been in a Bull Market since the lows of March of 2009.  I believe that while this is true, they discount looking back to December 31st, 1999 to pursue a self-soothing narrative. 

In historically comparable “Bear / Flat periods” you will see similar types of significant moves off major lows which allowed pundits to claim we were in a “new long-term Bull Market”.  Many will suggest that, should we move substantially higher in the future, the lows of March 2009 were the starting point for the end of the “Bear / Flat period”.   In reality, all that has happened is a recovery from a massive downturn in a long term “Bear / Flat” market trend.     (My assertions will be proven out later in this document.)

Few in the financial or main stream media will recognize or admit that we’ve been in a “Bear / Flat” market since the end of 1999.   While the market achieved an all-time high during May of 2015, the reality is that feat isn’t historically significant. 

Recent performance coincides with the negative, or at best, neutral view of the market.   For example, at the end of February 2016 the market was virtually at the same ending point (1932.23) as to where it was on May 31st, 2014 (1923.57).  At the end of March, 2016 the market registered a closing price of (2059.74) which was nearly identical to where it was on November 30th, 2014 (2067.56).    In between there have been some rather steep selloffs and breath taking rallies; yet in the end all that has occurred was fear and panic on the downside, relief on the upside and going nowhere fast in the interim.   In fact, what the market has been experiencing for almost the last two years is a microcosm of the last 16 years. 

Are “Bear / Flat Periods” Devastating to Investors?

Since 1871 “Bear / Flat” periods have been repeated multiple times. In each instance they are psychologically crushing to the typical investor.   As stated earlier, they generally follow long and massive Bull Markets.   Bull Markets end as a result of exceptional performance that causes a significant misallocation of capital.

To provide some perspective of past periods of various market trends, the following historical comparisons of long Bull Markets and subsequent “Bear / Flat” periods were: 

                                                            Bull Market             Bear / Flat Periods

                                                            1890-1902                      1903-1914

                                                            1915-1929                      1930-1947

                                                            1948-1965                      1966-1981

                                                            1982-1999                      2000-today

As you can see there are some significantly long Bull Market periods followed by an extensive “Bear / Flat period”.   In between each period you had mini-Bear / Bull Markets but they didn’t change the long-term trajectory of the trend.

Concentrating on the current “Bear / Flat period”, it is my belief that the negativity of the market gravitates consciously or subconsciously to the person that doesn’t invest in equities.    You would think that a mindset “if the rich are doing poorly because the market is down or hasn’t made any headway, than it might hurt me in some manner” is a highly probable emotion.     

Case in point is that often I have lunch in Raleigh at a popular venue with three wide screen television monitors throughout the restaurant.  Upon entering the general manager will often switch for me one of the monitors to CNBC.    While eating there will be times that I observe the customers to see how they react to what is being broadcast.   What I have found very interesting is that on negative market days, many of the patrons will watch or glance at the screen quite a bit.   On positive days there will be some interest but many of them continue with their general conversation.   My “test subjects” include high school students, as well as, adults of all ages and economic profiles.   Occasionally, I will have some interesting conversations with the patrons. 

Now this may appear to be a crazy experiment or the observations may even be a one-off because I have tapped into an unusual segment of the population.  However, I don’t believe that is the case despite conceding that my “test subjects” won’t react negatively or positively to the day-to-day gyrations of the market.  Rather if they were exposed to CNBC on a daily basis or were subjected to the cumulative effect of the business news, an internet article, a newspaper or magazine where the market news was positive or negative - whether they were investors or not - they would adjust their spending patterns based on the outcome of the financial markets. 

Since the beginning of 2000, the market has had numerous moves to the upside and downside and has yet technically “gone nowhere”.  I believe it has spilled over into the psychology of the investor and the economy as a whole.

 

CHECK BACK MONDAY FOR PART THREE IN THE SERIES

 

Underlying source for market data and TRG analysis presented is www.moneychimp.com  Past performance should not be viewed as a guarantee of future investment returns.  Data has been gathered from sources believed to be reliable; however we do not make any claims as to their accuracy or completeness. It is not possible to invest directly in the S&P 500 index. Exposure to an asset class represented by an index is available through investable instruments based on that index. Returns for the S&P 500 index are presented with dividends reinvested.

 

 

Tom is the Founder of TRG and has been the President and Chief Investment Officer since 2008.