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April 2, 2009

The Next Bull?

Has it started yet?  Have we seen the bottom?  The answers to these questions are unknowable.  The market is nothing if not frustrating.  There is no clear signal when a bottom has been reached, and the next bull market has begun…it is pure folly to try to time the market.

As an example, let’s look at what transpired in March.  According to the American Association of Individual Investors, 70% of investors became bearish during the first week of March, following declines of 8.6% and 11% for the S&P 500 during the months of January and February, respectively. This bearish feeling was the highest ever recorded.  Just then, the markets responded with the sharpest two-week gain since 1938!

What is clear is that the last ten years have not been kind to the stock market.  While the long-term trend of the market is up, there has been a few times where the ten-year average has been negative.  The 1930’s and 70’s both produced negative returns.

A prolonged period of negative growth in the market is referred to as a secular bear.  History shows that secular bear markets have been followed by prolonged bull markets with above average returns.  In the ten years following the secular bear market in the 1930s and 1970’s, the market rose 9% and 15% on an annual compounded basis, respectfully.

History also indicates that a bull market usually begins before the economy works its way out of a recession.  In fact, the returns of the S&P 500 from its low to the end of the recession has averaged 25%.  Over the last 11 bear markets, the one-year average rate of return from the market lows has been 43.08%.  Waiting for a clear sign that the bear market is over means forfeiting those early gains.

Another historical fact is that the individual investor arrives late to the party.  The “wait until things get better” attitude is one of the main reasons individuals have not fared as well as the market.  Benjamin Graham, the legendary investor, and Warren Buffet’s mentor once said “the investor’s chief problem, and even his worst enemy, is likely to be himself”.