Can bull markets and economic cycles die of old age? The longer the current market rally continues, the more this question is being asked. But does it have any weight?
Trying to answer this question is difficult. The current U.S. economic expansion is the second-longest in history since World War II. If it continues for another 12 months, it will be the longest economic expansion ever.
While there is almost no data showing age is a limiting factor for economic expansion, the longer an expansion continues, the higher the odds of a fatal mistake or excesses that usually end up causing a slump.
Bull markets are more difficult to understand. For example, right now, the bull market is pushing into its 10th year, although you could argue that some parts of the market are already in a bear market.
Toward the end of February, nearly 20% of stocks were down 20% or more from their most recent 52-week high. Is this a sign of things to come? Maybe not. The S&P 500’s current forward price-earnings ratio is well above its five and 10-year averages. Meanwhile, the cyclically adjusted price-earnings ratio is at one of the highest levels in history. Looking at the market’s price-earnings to growth ratio, however, or a price-earnings ratio that accounts for earnings growth, stocks appear to be trading at their cheapest level since 2012.
Put simply, depending on where you look, you could argue that the market appears to be both over- and undervalued today.
So what? Trying to time the market is an impossible task, so trying to time based on the mixed data about the state of the market is undoubtedly unsuitable for most investors. Instead, it may be best to focus on individual companies, companies where each business offers value, and go from there.
What do gurus have to say?
It is at times like these that a quote from Peter Lynch always comes into my mind:
"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves."
In the opinion of this author, the above sums up the current market environment. Since 2009, there have been bears calling the end of the bull market and, if you would have followed them, you would have lost a lot of money over the years.
Lynch had the right mentality. Rather than trying to time the market, he focused purely on finding the best stocks and then taking advantage of market movements to buy in at the best prices:
"I can't recall ever once having seen the name of a market timer on Forbes' annual list of the richest people in the world. If it were truly possible to predict corrections, you'd think somebody would have made billions by doing it."
Benjamin Graham was also well aware of the perils of trying to time market movements:
"In the financial markets, hindsight is forever 20/20, but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility." -- Benjamin Graham
In fact, Graham believed market timing was a tactic of the speculator, not the investor:
"We are convinced that the intelligent investor can derive satisfactory results from pricing of either type (market timing or fundamental analysis via price). We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator's financial results." And "The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices." -- Benjamin Graham
Warren Buffett (Trades, Portfolio) is also well aware of the dangers of relying on forecasts or marketing timing:
"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children."Â
So overall, while there might be some evidence to suggest the current bull market is running out of steam, there's also data supporting a possible run higher by equities. Trying to predict which one of these two scenarios will unfold could be almost impossible.
With this being the case, it may pay to follow the guidance of the world's best investors and avoid any kind of market timing.
