Blood in the Streets — Is the Bull Market Over?

My friends,

     2016 has gotten off to a very troubling start with stocks tumbling and investors all over the world worried to death, for perfectly understandable reasons. Fear is running so strong you can almost taste it. It has not seemed this gloomy since 2011 when Greeks were rioting in the streets, France was about to be downgraded, and fear was rampant that Italy and Spain were about to become economic grease spots. While somehow we got through then (as now), the irrational impulse to “sell before it goes to zero!” can become a bone-chilling shriek (even to professionals…at least those who let it). While many stock markets are starting to look cheap again, something like the human fight-or-flight instinct makes it harder to see that.

     Times like these are very dangerous, not so much because of the risk of investment losses (or the saber-toothed tigers that spawned the instinct), but because hardwired behavioral “herding” tendencies that these conditions induce can distort thinking and prompt poor decision making that can cost investors big. Don’t let irrational fear make you shoot yourself in the wallet.

     While the market drops are gut-wrenching, it is very important to remember the long-term perspective that stocks over time have been the place to be—even though corrections, bear markets, and most investors need the profit potential of stocks to make their retirement income plans work. Humans are not really wired to think this way, but those that force themselves to tend to wind up with more money. Think of how Buffett cheers down markets as times to buy, not sell. Unless you need to spend a lot of your investment in less than five years—in which case you should not be heavy in stocks anyway—you will probably be better off staying the course.

     The chart below (thanks, Jonathan!) shows a pretty scary year, which looked a lot like 2015, but was actually 2011.

     See the huge August plunge just like last year? At the time, many (not us) predicted that 2011—which had seen a near-doubling of stock prices from the March 2009 bottom—was the beginning of a bear market, during a time when U.S. economic concerns were, perhaps, as deep as China’s now, and many were predicting government bankruptcies across Europe. Still, those that hung on saw another 50% pop in the S&P between the dreary end of 2011, and the hammered prices we see as I write this in mid-January 2016. Just last month, I wrote, “While we expect the bull market to linger for another year or two on momentum—and because of a real lack of attractive alternatives—a short-term bear market will become inevitable at some point.” I stand by that, but don’t think this is the beginning of a bear market—just a sharp and needed correction. Even if a bear were to begin now, I would expect it to be short and a welcome buying opportunity, not a reason to run for the hills.

     I know that this has been a very compressed, scary drop. The impact on my own family’s accounts has been just as breathing as it has on yours, but I have sold nothing and would buy as much as I could at these prices. I don’t know if we are quite at the bottom yet, but I strongly believe these things:

  1. The market and the U.S. economy are not going to zero—in fact, I expect both to show additional strong gains this year.
  2. The bull market in stocks is not over, and I expect further gains and new record highs later in 2016.
  3. Stocks have gotten attractively cheap; this represents a strong buying opportunity for those with cash to put to work for a while.
  4. This is but a mere dip in the long-term stock trend. The future will bring much higher stock values and profit for those who can control their fear, take the long view, and stay the course.

     Try to stay calm, and remember past periods like this that you have lived through—and eventually profited after. Forgive me, but the market can be like climbing a mountain—until you reach the tree line, all you see are rocks, mud, and trees—and swarming insects. Eventually, though, the summit pops into view, and all is worthwhile.

     Be strong, and prosper.

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