All Part of the Cycle

By Scott Chan, Leeb's Market Forecast

The equity rally turned five years old last week as the S&P 500 continues to close at or near record highs. After reaching a low of 666 on March 6, 2009, the S&P 500 has rocketed up 34% in 2013, 60% since 2011 and an astronomical 205% from its 2009 lows.  While these extraordinary returns have helped portfolios recover from 2007 and 2008, the general investor’s psyche lags the market.

In early 2014, investors were shaken by two different events. In January, concerns over potentially slowing growth in China combined with the decision by Argentina’s central bank to devalue its currency sent shock waves throughout the emerging markets and smaller ripples into the U.S. market. With the stock market down 5 percent, panic seemed to spread throughout the market. Headlines exalted an end to the five year bull-run and commonly warned investors to prepare for a significant retraction. However, within two weeks, the markets had rebounded and had erased all losses. In fact, the entire cycle from peak to trough and back to peak lasted only one month.

Increased tensions in Ukraine caused the S&P 500 to drop by more than 1 percent in a single day. Once again, predictions that a conflict in Ukraine could cause a global slowdown splashed across the headlines. Within one day, the markets recovered as tensions seemed to ease. While the situation in Ukraine is far from over, as of now it appears that the fears of the investing public are far greater than the financial effects most likely to occur.

The sustained positive momentum does not presage another significant rise in equities for 2014. Valuations, while within historical ranges, still look high. Furthermore, while disappointing economic indicators could be blamed on the harsh weather this winter, it is possible the U.S. recovery could again stall and frustrate hopes for a full blown expansion. These risks are real and important to remember when investing. However, it is equally important to realize that dips and peaks remain ever-natural parts of any normal market cycle.

As seen in the chart below, even during one of the strongest rallies in the history of the S&P 500, we have seen pullbacks of 11 percent, 16 percent and even 20 percent. In the midst of a correction, it is difficult to keep one’s emotions in check. Memories of a one-day, 700 point decline in the Dow or a 50 percent market decline are too painful to forget. At the same time, successful investing demands focus on the long term, and not a myopic view of day-to-day ups and downs or aberrations.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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