The longer a bull market runs, the more nervous a lot of people get about it ending. At least at the moment, there is nothing even close to the appeal of holding common stock.
Whoever came up with the phrase “what goes up must come down” certainly wasn’t a stock investor. It is well known that stocks do accumulate value over time, at least on average and over enough time.
There is a clear bias upward with stocks over time, and this is due to a number of factors including things like economic growth and the growth of investment itself in particular. Stock investing used to be something limited to only the wealthy, but this is now very commonplace at even a grass-roots level.
This of course doesn’t mean that everyone is participating, and it takes the ability to save to invest, which is something that for various reasons is beyond many people. There are some who simply only earn enough to barely get by, but many more who simply value present enjoyment more than they value the future, even being happy to leave themselves short later for their moments in the sun.
When we look at the prospects for the stock market in the coming years, we do need to realize that times have really changed since the old days. Stocks behave much more like the economy does than they used to, where participation levels were much lower and it didn’t take anywhere near this much to cause a long exodus than it would now.
We are so much more invested in the stock market than we used to be, and invested here doesn’t just mean money, it’s even more about how our philosophical investment has grown, where we have wedded ourselves to the idea in a lot of cases. If enough people plod along, markets will follow.
We still have had our moments, and panic can still run rampant as it did in 2008, but in the end, we pulled ourselves up off the ground and drove things much further ahead, which continues to this day.
Stocks Simply Dominate Other Forms of Investment
For those who wish to grow their capital at levels significantly higher than the level of inflation, stocks provide not only the best way to do this but the only real way for the great majority of people to achieve this.
During bull markets, this level of growth extends well beyond the average returns of 6% that have been achieved historically with stocks, and we only need to look at our current run of over a decade now to see just how much you can really make during the good times.
Even over longer periods of time, for instance over the past 30 years, which is often used as a benchmark for long-term investing, we have seen a lot better than 6%. It’s actually more like 30% during the last 30, with all the ups and downs we’ve had over this time.
The last 10 years have been even better, and from the low in 2009 until today we’ve averaged a heady 44% per year. If we too far back though, this will indeed take us to a different time in history where the engine that drove stocks was nothing like today’s model, and therefore comparisons aren’t really that valid because the markets and the economy is so distinct now.
This does not mean, of course, that the next 30 will deliver 30% per year, but it is clear that the stock market does grow over time and there’s little reason to not expect this to continue on a much grander scale than other popular forms of investments.
This also does not mean that the best strategy is to just stay the course even though that’s proven to work so well in at least this past 30 years. Some real bad moves do come along from time to time and it does make sense to seek to at least minimize the blow and actually not be invested in them at all during these times.
We do need to pay attention to real signs of a pending collapse, but this is not really not on the horizon right now. In fact, things actually look pretty good for all of this continuing for the next few years and perhaps even much longer than that without too many real bumps in the road.
The Road Ahead Still Looks Promising for Stocks
Charles Lieberman, chief investment officer at Advisors Capital Management, sums up the current situation well when he recognizes that “the ideal environment for stocks is low economic growth, low inflation, and low interest rates, and we have all three now.” This is exactly what we have been telling our readers for quite some time.
Bonds have also been running pretty hot lately, but none of this has taken away from the growth of stocks, and these things actually can co-exist in the right circumstances. Those who are seeking long-term yields aren’t going to be too impressed or excited with the low yields that this has produced though.
The time to be in bonds is when stocks are going down and bond prices are going up. Both are going up now, and when you have that, stocks are by far the better option. If both are going down, neither are appealing and even cash can be the better option.
There are some who have somehow been lulled by the appeal of private equity, which is basically buying positions in companies without the liquidity or the expression that public trading provides. There’s a reason why a lot of companies have gone public, and that’s because companies simply become worth more.
The expression part means that shares are allowed to have their future value, or rather, the perception of future value that people have about them, become more expressed in their price. While a private company may take many years to build up their business in the way they want, the stock market can take your share price there much faster by just valuing in this future success and valuing it by a lot in some cases.
While it’s true that people do value private shares in terms of their future value as well, this expression really comes home to roost when you just put all this to a vote and people have more and more money to vote with.
We can just look at the S&P 500 to illustrate this. People are saving for retirement, and many are putting their savings in this index. What do you think happens when more and more people have more and more money to put into this over time? This does not happen with private equity at anywhere near this level.
However, private equity is indeed becoming more and more popular and is attracting more and more money. The Blackstone Group, the biggest player in the game, has significantly added to their inflows over the past while and now manages over half a trillion dollars.
Their investments have only returned 5.4% year to date, which completely pales in comparison to what public stocks have done over this time. Blackstone tells their investors not to expect returns similar to public stocks when they are going up, which perhaps should have them wondering why they are investing in this stuff in the first place during bull markets.
In a bear market though, public stocks will be considerably more volatile and therefore have a larger potential for losses. This is not the condition of the market though nor has it been for a long time.
Hedging is always pretty popular though, even though we may also wonder why we need to hedge a healthy market. Big institutions have to but individual investors do not hold assets of a scale even approaching this need.
Warren Buffett, the long-proclaimed king of investing, has been hedging a lot lately, and is now sitting on $124 billion worth of cash. His fussiness may have served him well over the years, but you can be too fussy as well, and there is a time and a place to hold this much cash but not in the midst of a bull market and a year that has produced over 20% on average since the beginning of the year, and it is barely half over.
There are definitely times to head for the hills, like when we started to see the concerns about all the potentially toxic securities out there that made the news in 2008. What was on the horizon was as scary as we have ever seen, even using the word catastrophe well ahead of then it actually hit. If that doesn’t scare you out of your stock positions, it is unlikely anything will, save for perhaps the event actually happening in full force, where you are left at the bottom, still on the ride, and wondering what to do now.
We’ve got nothing on the horizon even close to this, and the worry about the tariffs or the slowing economy is not of this degree at all. In fact, we may still keep moving ahead in spite of these relatively minor concerns, if people just keep their eyes ahead and keep putting their money in stocks as they have been accustomed to.
While some may feel more comfortable having significant portions of their portfolio in other things, perhaps because they do not trust themselves or are unwilling to make these changes when they actually become necessary, there’s really no better place for your money right now than in the stock market. We still need to keep our eyes on the road though.