March 9, 2009 marked the nadir of the S&P 500 during the financial crisis that we now know as the Great Recession. Five years later the S&P 500 is up 178%, capped off by a 33% return in 2013. There have been 32 bull markets since 1900 and this is the fifth longest in duration and the fifth largest in terms of percentage return. The market’s return in 2014 has been essentially flat, which is not surprising considering the panoply of issues we have faced. The S&P 500 has been roiled by the polar vortex, Putin’s forceful annexation of Crimea, and a slowing of growth in China, South Korea, Russia, and Brazil. Throw in the political turmoil in Venezuela for good measure.
While the S&P 500 is today just above where it started at the end of 2013, January proved to be a difficult month and the market retraced by nearly 6%. While we believe that gradually improving economic conditions will support an upward move in the market, we believe there will likely be increased volatility for the remainder of this bull market. While the S&P 500 had 16% and 18% pull-backs in 2010 and 2011, respectively, the market has not had a 10% correction since August of 2011. This leads us to conclude that a more substantial market correction should be expected, but is likely not to signal the end of the bull market. In fact, we would consider such a move healthy for the continued life of the bull market and would likely add to our equity positions.
The market’s move up over the past five years has been driven in large part by the Fed’s monetary policy of leaving short-term interest rates at artificial lows while purchasing trillions of dollars of bonds in the open market to do the same for long rates. This policy has forced a “risk on” trade, leading institutional and now retail investors into the equity markets. However, the effectiveness of this policy has run its course and corporate earnings must now provide the fuel for a continued move up in the market. How much further the market can go will be dependent on the improvement of corporate earnings as well as inflation and short-term interest rates remaining low. As always, prudent diversification is of paramount importance and is the cornerstone of our clients’ portfolios.