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Looking beyond the bull market

moneymatter 600When the latest bull market for U.S. stocks reached the five-year mark on March 10, 2014, only five bulls had lasted longer. The Standard & Poor's 500 index posted a gain of 177 percent for the five-year period.

The current bull followed on the heels of the Great Recession and the worst stock market decline since the 1929 stock market crash. The most recent bear market began in October 2007; the S&P 500 fell 57 percent before hitting the bottom on March 9, 2009.

In typical fashion, investors who sold stocks during the downturn may not have participated fully in some of the subsequent bull market gains. A recent Morningstar study found that emotional trading practices had a negative effect on investment returns over the last decade. For the 10-year period ending December 31, 2013, investor dollars returned an average of 2.5 percentage points per year less than the average mutual fund's performance, largely because people have a tendency to buy high and sell low.

Looking back

CharlesSimsJr-160A bull market is often defined as a period in which asset prices rise 20 percent or more without a drop of 20 percent in between. A price decline of 20 percent is called a bear market. Most of Wall Street's worst bear markets have been caused by recessions, but history shows each bull and bear market to be different.

• The longest and most profitable bull market began in late 1987 and lasted until the tech bubble burst in 2000, posting a 582 percent gain.

• During one rough period from late April to early October 2011, the S&P 500 lost 19.4 percent based on closing prices. However, the index actually dropped below the 20 percent threshold for a short time during the trading day on October 3. Some people believe this resulted in a momentary bear and the beginning of a new bull market.

• There have been a total of 12 bull markets since the end of World War II (including the current one). Half of those lasted five years, and only three made it to a sixth year.

Room to run?

The terms "bull" and "bear" are also used to describe the positive or negative outlook of individual investors.

Some bearish investors believe central bank policies have helped sustain the bull market, and that stocks could suffer as the Fed cuts back on monetary stimulus. Moreover, price increases have outpaced earnings growth, making stocks more expensive relative to corporate profits. The S&P 500 traded at about 16 times earnings over the past year, which is about twice the level five years ago.7=

On the positive side of this perpetual argument, bulls point out that the stock market has been rising from generational lows and could climb further if economic growth picks up speed. Stock prices generally reflect economic conditions and the financial performance of individual companies.

Volatility resumes

The S&P 500 posted a 32 percent total return for 2013, the largest in 16 years. Thus far in 2014, the stock market has been bumpier. The S&P 500 index experienced 11 market swings of 1 percent or more through mid-March. By and large, these sell-offs and relief rallies were in response to news about monetary policy, the Ukrainian conflict, and signs of economic weakness in China and other fragile economies.

Even professionals have a difficult time predicting market turning points, so investors may hinder themselves by changing course based on current events or recent performance.

Though it may be human nature to be wary of stocks during a bear market, a long bull market might tempt investors to invest too aggressively. For this reason, you might want to pay less attention to the market's ups and downs and stick with a long-term strategy based on your time horizon, risk tolerance, and financial goals.

(Charles Sims Jr. is president/ CEO of The Sims Financial Group. Contact him at 901-682-2410 or visit www.SimsFinancialGroup.com.)

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