After spending most of January and a good part of February in negative territory, the S&P 500 rallied through March 2nd to set all-time record highs. Shortly thereafter, on the other hand, volatility returned to the mix. For example, on Tuesday, March 10th, the S&P 500 turned negative for 2015 after logging its second worst performance of the year. What’s more? So far in the month of March, the S&P 500 has failed to log two consecutive up days.
Now Gary and I don’t want to be a boy who cried wolf, but we feel that the stock market is exceptionally likely to see a pullback in the very near future. And it could get ugly. Considering the fact that we have not seen a significant stock sell-off since Greece stoked the Eurozone Crisis flames in the summer of 2011, many may forget what it’s like to endure an 18.8% plunge in prices over a few short months. Or worse… a monstrous 55% decline over 1 ½ years (2007-2009).
Unfortunately, the news for stocks is not improving. Gary and I recently conducted a historical study of popular price statistics used to gauge stock valuations. The premise? At which point did over-inflated balloons come crashing back down to earth? And how do those previous occurrences compare with today’s stock valuations?
We compared the current median price-to-earnings (P/E) and price-to-sales/revenue (P/S) with previous points in history. Notably, we were interested in those periods of time that led up to the point in which stocks cratered into the ground—periods like 1929, 1973, 1987, 2000 and 2007. Our conclusion? Those fundamental metrics put the current price of stocks at loftier levels, on average, than all of those previous periods which led to some of the biggest market catastrophes ever!
The bad news does not end there. Being the numbers geek that I am, I crunched some statistical figures to provide me with perspective on the probability of our current bull market cycle’s continuation. Does it still have legs?
Looking at data for the Dow Jones Industrial Average (DJIA) going back to 1900, we are currently in the 35th bull market cycle. The average bull has lasted 795 days with an average cycle growth of 90%. The current bull market for stocks in the Dow? It currently stands at 2,184 days and 179% (as of the most recent high set back on 3/2/15). According to these stats, there is only a 2% chance that the current bull market will continue beyond 2,224 days.
Could we have already started the 35th bear market since 1900? Well, if the March 2nd highs are not revisited within the next 30 days or so, the likelihood is extremely high that the second longest bull market in history has concluded.
If the bull really has run its course – if the bear is gearing up to maul – then you need to take immediate action to protect your dollars. The average bear market drop is 32% and lasts roughly one year. Can you really afford to lose ONE-THIRD of your portfolio’s value over the next 12 months?
If you recognize the absolute necessity of protecting your wealth, then get acquainted with the FTSE Custom Multi-Asset Stock Hedge (MASH) Index. The MASH index is a tool that Gary and I developed to help protect our clients from the inevitable bear that looms on the horizon. Please click here to learn more about the MASH index.
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