Summer is Almost Here. Does History Tell Us It’s Time to Sell?

Just two months ago, we celebrated the 10-year anniversary of this bull market with the S&P 500 more than tripling from its low in March 2009. At the time, it looked like the great returns would be continuing. But trade wars resurfaced, markets reacted negatively, and now you are asking yourself if you should do anything to protect your portfolio.

Before you make any decisions, it’s best to evaluate the current state of affairs.

The positives:

  • The S&P 500 has rocketed more than 300% since hitting its low on March 9, 2009. That’s an increase of approximately $21 trillion, according to S&P Dow Jones Indices.

  • Employment and investor sentiment figures have hugely improved over the past 10 years, so much so that you may have forgotten how nervous and uneasy you felt during the depths of the financial crisis.

  • Interest rates remain low and earnings growth is strong, even if it is less robust than recent quarters.

The negatives:

  • To state the obvious, nothing lasts forever. This bull market is now the longest in U.S. history. Many experts aren’t calling for a bear market or even a recession this year. However, each passing day brings us closer to the inevitable.

  • Risk assets had trended higher through much of 2019, but higher U.S. tariffs on Chinese goods and increased skepticism for a deal have weighed heavily on stocks. Investors are skittish and volatility has jumped.

  • We’re heading into summer, an historically challenging season for stocks as shown below.

Source: Bespoke Investment Groups as of 4/29/2019

Source: Bespoke Investment Groups as of 4/29/2019

What Can Investors Do?

In light of this, should investors sell their stocks and shift to the sidelines for now? For anyone with a long-term time horizon, we strongly recommend against attempting to time the markets. That said, here are three things you can do to help you prepare for the next financial storm:

1.     Acknowledge that bear markets and recessions occur and typically occur regularly. The U.S. has been in a period void of serious economic and market downturns, but don’t be lulled into complacency. It’s not a question of if but when we’ll see the next bear market.

 2.     Adopt the 20% haircut approach. It’s likely that your portfolio is worth considerably more than it was during the Great Recession and that’s terrific. But investors who rely on their paper gains can easily become disappointed, or worse. Whether you’re an individual, institutional, or nonprofit investor, it makes sense to plan and budget with the assumption that your portfolio could be worth 20% less at any point in time. How might that alter your plans? What about your spending? The S&P 500 fell more than 50% in the last bear market. That was the worst downturn in decades, so assuming you have a somewhat balanced portfolio, applying the 20% haircut approach to the value of your portfolio seems like a prudent strategy.

 3.     Don’t sleep on diversification. As shown below, large U.S. stocks have been the darlings over the past decade, though that won’t always be true. In 2009, investors were questioning if it makes sense to even own U.S. stocks! Asset classes and regions come in and out of favor. Domestic stocks won’t always shine, and technology companies won’t always lead the pack.

Note: Monthly data; International stocks are measured by the MSCI AC Word ex USA index and commodities by the S&P GSCI index. Source: FactSet

Note: Monthly data; International stocks are measured by the MSCI AC Word ex USA index and commodities by the S&P GSCI index. Source: FactSet

It’s impossible to predict exactly when the next bear market or recession will happen, but these principles should help you prepare for unavoidable downturns. You can always contact an advisor at Fi3 with questions about your portfolio.

 Disclosure: While this article addresses generally held investment philosophies of Fi3 Advisors, it does not represent a specific investment recommendation for any individual client or prospective client. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Information has been obtained from a variety of sources believed to be reliable but not independently verified. Past performance does not indicate future performance.

[1] Bank of America Merrill Lynch data as reported by The Wall Street Journal March 10, 2019