Tuesday , 24 May 2022

The S&P 500 Is 12% From Bubble Territory – Is Now the Time To Sell Out?

The S&P 500 Index increased more than 31% in 2019, putting last year among the very best going all the way back to 1928. Is it now time for investors to de-risk, or should they continue to hold their positions?

SP 500 Total Annual Returns from 1928 to 2019

Looking at the chart above tells me a couple of things in particular:

  1. stocks have historically been much more likely to end the year with a gain than a loss. The implication, then, is that a buy-and-hold strategy has worked out for a lot of investors in general—even those who still may have memories of the tech bubble 20 years ago and financial crisis more than 10 years ago.
  2. At the beginning of 2019, a number of economists and so-called experts were sounding the alarm bell over:
    1. the inverted yield curve,
    2. U.S.-China trade tensions and
    3. slowing global economic growth – and yet look what happened…

My point is not that you should put blinders on and ignore the risks completely but neither should you take action every time Chicken Little warns you the sky’s about to come crashing down. Investors who continued to participate in 2019, despite the warnings, were rewarded.

[That being said, one of the biggest concerns some investors might have right now is that the U.S. business cycle is maturing and possibly reaching its “natural end”…but most economists…agree that time alone is not enough to kill an expansion. Take a look at the chart below.

  • The U.K. managed to go from 1992 to 2008 without experiencing a recession.
  • For the Netherlands, that period was even longer, lasting from 1982 to 2008.
  • Longer still is Australia’s economic expansion, which has continued uninterrupted to this day since it began a remarkable [run] 29 years ago.
  • At 10 years old, the economic expansion is the longest in U.S. history, but it still has some catching up to do if we compare it to the aforementioned nations’ track records.

Is it likely the U.S. business cycle will last another 19 years?

  • Probably not, but could it happen? Absolutely, and if it did, that would mean we’re mid-cycle right now rather than late-cycle.
  • Another possible concern is that the market has gone up too far and too fast, and that we’re heading for a bubble… Specifically, the S&P 500 would need to climb past 3,700 in the second half of 2020 for it to be consistent with bubble formations in the past…
Editor’s Note:  The above excerpts from the original article by Frank Holmes  have been edited ([ ]) and abridged (…) for the sake of clarity and brevity.  The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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