"A Decade of Firsts? Part-1 of 2"

The last two years were a strange time for the stock market. In May of 2015, the market barely scraped out a new high, squeezed out a 3% gain through the first 4 ½ months, and proceeded to move sideways with a downward bias for well over a year. Even when summer of 2016 set in and things started to smell a little rosier, the upcoming election put a spell on the market, causing uncertainty that sent the market down more than four percent before election day. It wasn’t until after the election that the market decided to buck the risk of a market crash and the probabilities of such an occurrence fell swiftly in the weeks that passed.

So here we are today, living in the 2nd longest bull market in history – second to only the late-80’s and 90’s, when the market rocketed northward for 14+ years. In order to “beat” the 1st place finishing dot-com run of the late-90’s, the market would have to continue northward, without a single crash, from now through 2023. Seems crazy, but I suppose anything is possible. 

The definition of a market crash is widely accepted as a drop of more than -20% in the cap-weighted S&P500 index. It should go without saying that the 30 stocks on the Dow Jones Industrial Average typically align closely with the performance of the S&P500. 

What’s interesting is that the stock market crashes every seven years on average and the average drawdown in such a crash is just under -42% (which means that half are better and half are worse).  Understand that the stock market is a “leading indicator” of economic recessions, which means the market falls first, then a recession occurs after.   

Speaking of economic recession (not stock market crashes), most reputable economists were forecasting a recession would’ve already taken place by now. In fact, the well-known and extremely accurate Ned Davis Research Global Recession indicator was predicting that a recession was all-but-guaranteed (see below how recessions have taken place in every circumstance where the indicator rose above 70, except in 2015-16)! 

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

This is an obvious “first” – at least since 1970, anyway. The question going forward is, “Will this 10-year period be a decade of firsts?” 

Bringing our attention back to the stock market, we’re officially living in year #9 of the current, active bull market and so far, at least since the end of 2016, the stocks have made a turn for the better and look surprisingly, very healthy.

In fact, while the Dow managed to drop to the tune of roughly -1,000 points in overnight trading on Election Day, and while it was widely expected that a Trump victory would end in the kind of uncertainty that would cause a market crash, the opposite occurred.  

Promises for making America great again, building a wall, revamping the healthcare system, and sweetening the tax code for businesses in the U.S. were all absorbed by investors in a positive way – so much that political instability in the Middle East and North Korean missile launches can’t seem to derail the train. Now it’s time to see if those promises are kept or broken (the latter being the case in most situations involving politics and politicians).

The next test for the markets will be their reaction to the “seasonally weak” months of the year, which began May 1st and end on Halloween. Stay tuned for Part 2 of this “Decade of Firsts” series in the next week or two. 

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Warmest regards,

Adam