The longest bull run in American History is running its course. Sometimes ego overshadows common sense. At times we fail to see truth because the lie is more pleasant. Since the dot com bubble we have seen accelerating stock market values.
At the turn of the millennia the Dow Jones had a value of 16,000 (more or less). At the start of our current bull run the Dow Jones had a value of about 8,500. Today the value of the Dow Jones is nearly 26,000.
With the exception of November 2007 to February of 2009 the stock market marched one way. The way the stock market marched since February 2009 is up.
Below is a chart compiled from data taken from Macrotrends.
People who did nothing but stay blindly in the market for the past years enjoyed massive stock market appreciation. Index products found support in many financial advisors for this reason. How long would you say a market goes up? Let’s put this question another way.
How long can a sprinter sprint?
A sprinter cannot sprint forever. Similarly a market tripled in value cannot exponentially grow forever. The growth rate or our US Stock market from October 1990 to February 2000 did a similar pattern.
A QUICK HISTORY ON THE MARKET
During the 1990 ten year span the market went from 4,694 to 15,303 in February 2000. The following twenty four (24) months the market value depreciated by 33% to 10,765. The market made a brief rally to its former February glory from 2002 to 2008. Then the financial collapse happened and the market cut in half. The brief rally was due to weak policies around banking, relaxed underwriting for loans, and credit rating flaws in portfolios that were risky.
From 1919 to 1990 a pretty normal range for the Dow Jones was 2,500–5,000. There were some break out years in the 1960’s which in the 1970’s led to the value being corrected.
History has shown time and time again large market value appreciations result in market corrections. These corrections have historically been anywhere from 20–50%.
Our current run was supported by government stimulus, increased federal debt, relaxed underwriting for business loans (i.e. the merchant cash advance industry), and credit rating flaws in these portfolios.
The market is now attempting to be extended under Trump by reintroducing weak policies around banking, relaxed underwriting for environmental laws (so we can see oil prices rise), and credit rating flaws in portfolios of US Treasuries.
Common sense to me says “How can someone pay me back when all they do is borrow to make payments?” That’s the US Government for you.
FINDING GOOD PICKS IN A BAD DRAFT
Every sport has a bad draft. Sometimes the quality of athletes is not good for selection. Sometimes a team has budget constraints. Other times politics prevent teams from grabbing the best players.
The United States is in a sports draft where athletic quality (our politicians) is not great, the home team is struggling with market cap (our government debt) and politics is preventing common sense solutions (like refusing to implement a VAT of 1% on financial transactions).
In a situation where all the cards stack against you what do you do? More importantly how do you control something that is completely outside of your control?
NEGATIVE CORRELATIONS TO MARKET
In every market stocks have a very good indicator called “Beta”. The Beta is how volatile a stock price in relation to the market. A Beta of 1.50 typically moves 1.5x relation to the market. If the market drops by 10% your stock might drop by 15% percent. The opposite would apply on appreciation. If a stock has a Beta of 0.25 then if the market drops by 10% your stock would typically respond by dropping only 2.5%.
Typically stocks with low betas often negatively correlate to the market. When the market takes a dump and one stock holds its value people tend to rush to buy the stock that didn’t go down.
A good amount of time this one indicator can protect your portfolio value or at minimum give you time to react.
If you combine Beta with “Alpha” a very strong rebound can occur despite a market dive. Alpha is how much more your stock returns than the market. So if market supported $1.00 in profit and you made $1.25 you would have an Alpha that is positive.
Other factors such as trend techniques, earnings, market cap and amount of stock available in the market influence the price; however, these indicators are very good fundamental guideposts.
COLLAPSE & RISE
The market is destined to do what it has always done. Massive appreciations lead to massive devaluations. After a bottom out of anywhere from 20–50% the market recovers and starts to trend upwards. Ladies and gentlemen this is history not an opinion. In these markets long term holdings are not good.
Fixed income items like Preferred Shares are good choices. Bonds can be good if returns are okay. REITs tend to hold value because they are actually worth something (they own real estate).
During the Collapse it is prudent to hold things with “tangible value” (i.e. book value). Look up the book value per share and make sure if your company closed tomorrow the assets would pay you back. If you’re playing in market value (i.e. your book value is $1.00 but your stock is trading at $9.00) you have a lot of exposure. Brace for the collapse and know where to stand when the rise comes. Follow me on Medium or subscribe to my newsletter to learn more insightful advice.
To your knowledge success!
About Christopher: Christopher Knight Lopez is a Professional Entrepreneur. Christopher has opened over 7 businesses in his 14-year career. Christopher’s purpose is to take advantage of various market-driven opportunities. Christopher is a certified Master Project Manager (MPM), Master Financial Planner (MFP) and Accredited Financial Analyst (AFA). Christopher previously held his Series 65 securities license. Christopher also has his General Lines — Life, Accident, Health & HMO. Christopher has managed a combined 286mm USD in reported Assets Under Management & Assets Under Advisement. Christopher has work experience in 29 countries, raised over 50mm USD for various businesses, and grossed over 7.5mm in his personal career. Christopher worked in the highly technical industries of: biotechnology, finance, securities, manufacturing, real estate, and residential mortgages. Christopher is a United States Air Force Veteran. Christopher has a passion for family, competitive sports, fishing, martial arts and advocacy for entrepreneurs. Christopher provides self-help classes for up-and-coming entrepreneurs. Christopher’s passion to mentor comes from belief that entrepreneurs need guidance. The world is full of conflicting information about entrepreneur identity. See more at www.christopherklopez.com