Still Not Nice To Fool Mother Nature?

by AvidTrader

Last time we wrote a piece that was atypically unbalanced for us. We felt that the negative factors imposing themselves upon the world stock markets were overwhelming the positives and there was not enough space to elaborate on the positive. We did highlight a couple of potential positives, but the gist was to be prepared. We do believe there is a high probability we have entered a Secular Bear Market similar to what we experienced domestically from 1966-1982.

A Secular Bull Market has an ascending trajectory that can last a couple of decades. A Secular Bear Market is not one that goes straight down for an extended period of time; it is more of a long trading range. Below we have a chart of the Dow Industrials dating back to 1960. This depicts the distinction between a Secular Bull and a Secular Bear rather well. As you can see the Dow flirted with the 1000 mark in 1966 before finally leaving the mythical number behind for good in 1983. Essentially 17 years of sideways action. Contrast that with the subsequent Secular Bull that lasted at least till 2000.

We say at least till 2000 instead of 2007 because some believe that the recent rally from the 2003 low was a cyclical rally in a Secular Bear Market that started in 2000. We don’t mean to split hairs here because the important thing to understand is that these types of markets have occurred in the past and will again in the future. The key question is “Is it now?”

Bulls and Bears are just the ebb and flow of markets and cycles. There are those who think that the last decade has included some financial engineering which has kept the economy and the markets afloat longer than they should have. They think the Fed and other policymakers would catch political heat if a recession occurred on the incumbent’s watch, so theories of perpetual growth were promoted. In our minds it is sort of like messing with Mother Nature and as we found out in the seventies’ margarine commercial, “It is not nice to fool Mother Nature.”

If we are in a Secular Bear Market that could mean that last year’s highs may be in place for several years. How do investors, especially those near retirement, accomplish their goals if this environment plays out? If you have enough assets to invest in a fixed income portfolio generating enough cash flow to cover annual expenses including inflation, that is one strategy.

BEGIN	END	DURATION	RETURN
Nov. 13, 1929	April 17, 1930	6 Months	+ 48%
July 8, 1932	Sept. 7, 1932	2 Months	+ 94%
Feb. 27, 1933	Feb. 5, 1934	12 Months	+ 121%
July 26, 1934	March 10, 1937	20 ½ Months	+ 127%
March 31, 1938	Nov. 12, 1938	7 ½ Months	+ 60%
April 8, 1939	Sept. 12, 1939	5 Months	+ 28%

If you need to realize some growth in your portfolio, a buy and hold strategy of stocks probably won’t work. Hiding from stocks completely is not necessarily the best strategy. Below is a table showing the rallies that occurred during the Depression. Notice three of them were in excess of 90%! The only problem is that every rally failed and gave the entire gain back. So obviously you had to be nimble to hold on to at least some of those gains.

The gist of the strategy is to invest when the market appears cooperative and attempt to avoid the market when it is not.