Are The Bull Markets Back?

After the biggest surge in the stock markets since 2009 this late November 2012, I’m left wondering whether we’re back to bull markets or whether now is a ripe time to sell.  Although it shouldn’t matter, the answer depends on how well your portfolio has done.  If you’ve been 100% invested in equities since the beginning of the year, you are likely only up 11%. If you’ve got a 50/50 mix of equities and bonds, you’re likely up in the mid single digits.

It’s always a good time to reassess one’s portfolio once a quarter, especially towards the end of the year. One should take a view on the markets in 2013 and rebalance accordingly.  If you’ve been following my site for a while, you know that I have a very optimistic outlook on many things.  Perhaps it’s because things are so robust in San Francisco thanks to so many great companies like Apple, Facebook, Google, YouTube, Twitter, and eBay all thriving.  Then again, I’ve always been very upbeat.

Below are some positives and negatives I can think about that will help in the thinking process.

The positives: November Chicago PMI at 60+ indicates an expansion.  Record high Black Friday and Cyber Monday retail sales demonstrate consumers are cashed up and positive about their jobs.  Low interest rates increase cashflow for property owners and anybody with revolving debt.  Pending home sales in November are up 10% MoM vs. +2% MoM expectations.  Private sector hiring continues to trend up with unemployment levels falling to a 2.5 year low of 8.6% as of November, 2011.  WTI oil is back over $100, signifying higher demand.  Corporations have the largest amount of cash on their balance sheets on record, signifying a potential unleashing of buybacks, increased dividend payouts, and M&A.  Markets have historically rallied during an election year on false promises.  Valuations are reasonable and the S&P500 dividend yield is more than the 10-year risk free yield of 2%.

The negatives: EuroZone debt crisis, US state budget woes, political gridlock, and unemployment rate still above 8%.

Positive anecdotes: Raised rent by 10% in one of my rentals this fall.  Vacation rental pre-bookings to Lake Tahoe have been the strongest I’ve seen in years.  Buses are so jam packed they skip stops, necessitating I walk three stops away to get on.  I have to call at least a week in advance to get reservations at a restaurant that averages $75 a person.  Zynga is looking to go public with a US$10 billion valuation in December.  Facebook is looking to raise $10 billion with a $100 billion dollar valuation in 2012.  Google had blowout 3Q results, even at its large size.  Online advertising income has been consistently on a stable to upward trajectory all year.  A friend went from an average $3,500/month two bedroom rental and bought a $3 million house out of the blue due to a liquidity event.  A couple friends are finding jobs and leads again when they couldn’t this summer.

Negative anecdotes: Compensation firms think bonuses will be down 20-40% in the financial industry on average.  Mass layoffs at companies such as American Express and the US Postal service seem inevitable.  The vacation property market is still quite weak.

OBSERVATIONS ABOUT OBSERVATIONS

It’s interesting to note the list of negatives is so short.   The markets tanked when the S&P rating agency first downgraded the US credit rating one notch.  Since every rating agency is downgrading every country now, the markets are no longer reacting negatively since it doesn’t matter!  We’re about the same!

We all know about the problems over in Europe as well as how screwed up our political system is.  Therefore, we expect our Congress to do nothing and Europe to fall into the abyss.  Since our expectations are so low, any progress will be taken as a positive.

The underlying fundamentals of the economy are definitely improving.  Things just seem to be taking way longer than expected.  Whatever the case, so long as the direction is correct, we’ll get there.

REBALANCING HISTORY AND NOW

My major rebalances this year was going from 100% equities on Jan 1 down to 30% equities and 70% cash on April 29.  The portfolio was up 11% and I wrote an article on Yakezie.com entitled, “Sell In May And Go Away: Stock Rebalancing Time“.  I then went 97% cash at the end of October after the markets tanked and came back a little, and on November 25 rebalanced the portfolio to 50% equities, 50% cash.

The reasoning for buying stocks was that the S&P500 was down 7.8% at the time and my portfolio was up 10.5% for a 18.3% outperformance.  If the markets rallied, I would significantly lose outperformance.  With a 50% allocation in stocks, the markets would have to go down 21% for me to start losing money in the portfolio.  On the flip side, the markets would have to rally over 36.6% for me to start underperforming the markets with a 50/50 allocation.  But if that’s the case, I don’t mind at all.

A 50% allocation in cash (not bonds) with the rest in equities is pretty conservative.  It basically says, “There’s a lot of uncertainty out there and I don’t have much conviction and want to play it safe.”  I’m usually 70-85% equities on average and the rest bonds/stocks.  I realize I will never get super rich being up just 10-15% a year, but with the 10-year yield at only 2%, I’ve decided that 10% is my hurdle rate of return for practically all asset classes.

When your mother fund starts getting chunky, capital preservation and decreased volatility is what you start to seek.  Let’s say you max out your 401K or whatever retirement vehicle you have every year for 20 years.  You’ll probably have $500,000-$1,000,000 after performance and company match.  The $17,000 a year contribution doesn’t make a big difference anymore because a 10% return on $500,000 is $50,000.  If you end up losing 20% one year, that’s $100,000 gone!  At a $17,000 a year 401K max contribution, that will take 6 years to make that money back!  The more you have, the more careful you need to be with your money.

I believe in stocks for the long term, especially as the world’s largest central banks continue to print money.  The real question is whether we can use our ever devaluing cash to buy stocks and real assets quick enough!  My gut says that the bull market is not back, and that if we can return 10% in 2012, that will be another homerun!

INVESTMENT PLATFORM RECOMMENDATION

Invest In Ideas Not Stocks: Motif Investing is a terrific company based right here in the San Francisco Bay Area. They’ve raised over $60 million dollars from smart investors such as JP Morgan and Goldman Sachs because they are innovating the investment landscape with their “motifs.” A motif is a basket of 30 stocks you can invest in, which are aimed to profit from a specific idea or underlying theme. Let’s say you think new housing construction is going to quicken in the US next year. You could buy a housing motif which might contains Lennar, KBH, Home Depot, Bed, Bath, and Beyond, Zillow, and more in various weightings.

You can buy a basket of 30 stocks for only $9.95, instead of buying them individually for $7.95 through a typical broker. You can build your own motif, buy one of the motifs created by Motif Investing, or buy a motif by a fellow Motif Investor with a great track record. You can even buy retirement motifs, much like target date funds, except you don’t have to pay the 1% management fee. You get up to $150 free when you start trading with Motif Investing. Given my focus on buying winning long-term ideas and ignoring the short-term volatility, I really like Motif Investing’s value proposition for retail investors.

Updated on 12/1/2014. The bull market is alive and well. Don’t forget to rebalance and manage your risk exposure. Everybody feels like a genius during good times.

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    Even as I see all the green in my portfolio, I’m not at all optimistic. Too many problems still lingering. I would use this as a time to “sell” – but at my age – I’ve never sold anything (I’m just buying less).

    • says

      The good thing about having a smaller portfolio is that you can easily catch up if you underperform with contributions. Also, if you blow yourself up, it’s not a lot of time and money invested either. You can afford to swing for the fences and miss! Time is on your side.

  2. says

    I’ve been using much gentler adjustments. For me the time I spend on my business is still worth a lot more than tweaking a little more return out of my portfolio, and the 6th minute I spend on my investments in a year is probably a losing proposition already. It’s still fun to keep track and make adjustments though.

    At the start of the year I thought stocks were a bit above fair value so I had as much as 20% in bonds. But as the prospects for stocks improved with every drop I’m down to a little over 10% in bonds now. I’m shocked and disappointed to find that this morning the main portfolio shows the market value has almost risen back to the book value (which shows how much I’ve put in this year) from a nice discount a week ago. There’s still time for it to go down some more before the next chunk goes in on the 10th.

    I’ve never thought that selling in May was generally reliable, but your experience makes me wonder if it’s a trigger when stocks are overvalued already. Someone should do research on that :)

    I wrote a post recently analyzing the future expectations for the stock market. If you think the last 20 years were normal then they could rise quickly but if you watch the long-term history instead you can only expect average returns from here.

    • says

      When I wrote the article in April, it really just coincided with being up 11% after only 4 months. Everybody was, and I thought that to be unsustainable hence the rebalance. Coincidental timing I guess.

      How you doing this year with your strategy?

        • says

          I can’t impress people at parties with it yet :) Well I might if they actually knew how much they’ve been losing…

          But I’ll take a strong possibility of a high long-term return over the certainty of a moderate short-term return. Your approach is great too because you know what you need and don’t get greedy taking on more risk when you’ve already made enough. Very few people would ever have the discipline to execute that.

  3. says

    FTR, WTI is up because US pipelines are being reversed to hedge the spread in WTI and brent. The run up, the way I see it, is more to due with markets finding equilibrium rather than real optimism. Maybe it is optimism…I’m not confident enough to say it is.

    I have no idea where the indexes are headed. I do know that the S&P500 is pretty cheap, relatively speaking. ROE of 28% and PE of 14 on the SPY ETF implies a general price-to-book of 2. I’m sure financials give that a lift – and I would absolutely discount the book value of any financial firm considerably.

    I’m encouraged by a poor economy. For one, CEOs at growth firms are going to have to continue the acquisition spree because it’s hard to grow when there’s no organic growth in the economy. Also, I’ve seen (maybe others have too?) an increasing amount of interest in corporate governance. Recently, a major shareholder in a core holding of mine announced they’d seek a change in the board of directors. Confirming my first point about the poor economy, a private equity/BD shop announced they’d back the change before the push for the war for the board even picked up traction. Possible sale? Not sure. But the good news is that shareholders are finally starting to care about the underlying businesses available on the financial markets.

    Of course, Bengenie is enabling firms to take down smaller companies. Investors who seek out LBO/merger plays will out-perform considerably over the next few years. Even if the markets don’t give you full price, buyouts ALWAYS give you full price. In my mind, investors are too quick to pass up this reality – you can do a DCF on a large firm and never realize the real value of the company. You’re infinitely more likely to get your full DCF price on smaller firms. I like the odds-on benefit here.

    Only have one fund, and it’s doing well.

    • says

      It is definitely a positive that corporate governance has increased. Should be good for the long term as negative management discounts dissipate potentially and a bigger trust of the markets and companies ensues.

      Over/under on S&P +10% in 2012?

      • says

        Under. Logical choice of the two, just because it’s over or under a positive 10%. Wouldn’t put a penny on it; hard to know what Wall Street will think 500 companies are worth as a collective 1 year and 1 month away.

        Case for higher: Election year. Dot coms.

        Case for lower: China. Australia. Europe. Dotcoms tainting whole tech industry.

        • says

          Oh, I’m just asking, not betting. The o/u betting line is probably closer to 6%. I think if Ye markets can return another 10% this year, that’s solid.

          The only bet I’m taking is that I believe Obama will win in 2012! Get the ProV 1 Titleists!

        • says

          I think we could easily have 10% upside for a short period of time. I’ve been really interested in the auto sector lately. The numbers coming out of these firms look really good. If nothing else, people are becoming accustomed to the idea that uncertainty is certain. Can’t put off that new ride forever.

          We’re getting close to an annual car sales rate equal to the rate set in 2009, when big gov bought everyone with a gas guzzler a new car. That’s bullish – and not just because I’m long Ford calls to Jan 2013, but because it’s a big ticket purchase. http://www.businessweek.com/ap/financialnews/D9RBSFL00.htm

  4. says

    What about if you are almost 100% stock and have been adding on dips? Just a theoretical of course…

    … I’m probably half funds and half stock. Some accounts I just toss money into funds so I don’t have to watch as closely, haha.

    • says

      I would guess performance to be flat as well, since you would have bought in an up 10% market and a down 8% market. The absolute value may be up by the. Amount contributed.

      What’s your performance and absolute amount YoY increase?

  5. says

    I sold some losers yesterday on the big gain day. You timed the market quite nicely Sam. I can’t do that so I stuck with about 80% equity throughout the year.
    My 401k didn’t do well at all this year. It is still down about 9% on the year due to all the foreign market fund in there. :(
    Our net worth is up about 10% from a year ago though. I guess I can’t complain too much. That’s including all the saving we did this year.

    • says

      Yeah, the foreign holdings this year have been such a killer compared to the relative stability of the US. They will probably snap back the most in a global rally.

      Congrats on your YoY net worth increase. I shoot for 10%+ on NW annual increase myself.

    • says

      Haha, yeah right. Just luck and following my own internal guidelines to take emotion and over thinking out of the equation.

      Let’s hope things stick until year end and no more negative surprises!

  6. says

    I am bullish about 2012 because it is an election year. If the early signs pan out, next year will be very bullish. Unemployment will be high, but that in itself does not have the same effect on the market. If jobs are created, it trumps the high unemployment. News from Europe seems to be better.
    My investment straegy is long term with investments in TIPS, biotech, healthcare, tech and divideend stocks.

  7. says

    I am in an unusual situation because I will have Social Security and a pension as guaranteed income. My portfolio is set for growth with a mix of TIPS, dividend stocks/funds, healthcare, biotech, tech, and various other funds and stocks. Currently, my fixed portion is roughly 25% and growing. My target is 50% in the next 5 years. I expect to live in retirement about 25 years.

  8. says

    I think the long-term still holds a lot of sideways moving as opposed to true “bear” or “bull” markets. There are sectors that will certainly see growth, but the Western world needs to slowly de-leverage debt at every level, and austerity measures will temper and high growth rates. I think the best-case scenario is that we see true growth in late 2013 or so. As a result of our refusal to regulate any of the ridiculous financial sector, I’m sure we’ll see a lot of volatility along the way (aka “The New Normal).

  9. says

    I don’t have a punt fund anymore. When I did, I invested in retail stocks but never made any money. …I sure hope the bull market is back. I feel like the economy is doing ok though. Not bad, not great, just ok. Maybe that’s my emotions talking because my manager told me no layoffs this month but no bonuses either!

  10. says

    Great article. Love your disciplined approach. It paid off! Nice week, but still a lot of danger out there. Didn’t sell in May so had to ride through the volatility. Feels like I broke even or down some because of regular contributions. Need to take some time to reassess. Nice job!

  11. Norviz says

    My portfolio is pretty bearish at this point. I think that my model has me at 15% bonds and 25% short the market and 60% cash as of the end of November. I have a very systematic approach though, and my thoughts don’t really enter into the equation of where my money goes.

      • Norviz says

        At the heart it is a relative strength model (those areas that have had the best recent performance are invested in) but I also have a market timing aspect and a core/satellite aspect. Basically I have a set of ETFs that are my investing universe, and the best sectors get the most weighting (Long term government bonds recently). There are core ETFs that I invest in at 5% of portfolio levels, and then I could add up to 10% more in related areas. (e.g. I could invest in foreign emerging markets EEM, and if the sector as a whole is doing well, then also invest in the highest performing related areas, maybe Korea and Turkey for a total of 15% in emerging markets). Obviously upderperforming areas don’t get invested in (e.g. Financials recently). I rebalance every month (but update and track weekly).

  12. says

    I LOVE your idea of a punt fund. I’m bullish for 2012. However, even if I wasn’t, my investment strategy “sadly” wouldn’t change much. Oh well, yes we’re pretty boring in this respect. Oh well, hopefully the bull markets are back. Cheers!!!

  13. says

    I am keeping an eye on the Eurozone, especially with Italian debt coming due the end of January, 2012. It could go badly, but I’m keeping my fingers crossed. That said, we are continuing our strategy of our 401K being in a fund geared to our age. Since we are retired that is going to be a fairly conservative strategy. We also have some stocks in commodity-related companies as a hedge against inflation. I’ll be happy if the bull is back as it will help that hedge as well as monies in our pension funds.

  14. says

    Wow, that is some variability in your asset allocation. I’m very concerned about Europe. But since I invest for long term I’m keeping a steady asset allocation, maybe upping USA equities a bit.

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