5 More Reasons You Shouldn’t Worry About A Bearish Autumn
I cannot believe the amount of bearish hype sweeping the stock market right now! Everyone and their brother are calling for a substantial drop in stock prices, and some are even bracing for a crash.
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The primary reason for the bearishness is the fact that stocks have returned on average 20% per year since the March 2009 price plunge bottom with nary a substantial pullback. Some metrics are even indicating that we are now in the longest bull market in history!
Add in the seasonality factor of autumn historically being the time crashes occur, global economic stresses, as well as the chaotic leadership style of the White House and a near-term bearish case can be made.
#-ad_banner-#However, this bull market is far stronger than these typically bearish occurrences.
While a crash is inevitable, it will not be anytime soon. In fact, the valid evidence is signaling that the market has at least a year before any substantial declines. In other words, I do not expect the bear market to start until at least September 2019.
Earlier this month, I gave seven reasons why I don’t expect a bear market this fall. In this article, I’ll provide five more.
1. The Stock Market Is Boring
This is indeed the most boring massive bull market I have ever experienced. Despite the average 20% yearly gains for nearly a decade, there is very little public excitement surrounding the stock market. It’s all very ho-hum and almost expected by casual investors. We don’t have the hype and excitement that usually surrounds surging bull markets and financial bubbles for that matter.
The fact that the stock market is dull portends to prices continuing to grind higher. There have not been any price surges resulting from the public going nuts over the market. That usually foreshadows the start of a bearish period.
2. Monsters Rule Wall Street
The stock market is ruled by three monsters. The monsters are BlackRock, Vanguard and State Street. These three behemoth institutions manage 80% of the nearly $3 trillion invested in American stock-based ETFs. The giant kings of the market have a vested interest in keeping the bullish run going far into the future. Stock-based ETFs capture the inherent nature of stocks to move higher and the giants controlling the ETFs fuel this fire.
3. The Passive Investing Takeover
Along with the aforementioned ETF theme, passive investing has become the de facto investment strategy of the masses. Passive investing uses market-weighted indexes and funds to capture the markets natural bias higher while avoiding fees and costs indicative of active trading. Many index-based ETFs are built on the passive investment philosophy.
The idea behind passive investing is to minimize risk and cost while building wealth over the long term. Active investing can make wealth much faster, but there is a corresponding risk, as well as higher costs.
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Passive mutual funds and ETFs comprise 42% of all U.S.-based stock market assets. This figure has soared from just 12% at the turn of the century.
Passive investing feeds upon itself, meaning as the stock price climbs, it attracts more capital, which in turn pushes the stock prices higher. It is this cycle that ensures the bull stays alive.
Of course, this cycle cannot last forever. It will eventually turn into a bubble, resulting in a stock market crash. However, according to Jack Bogle, founder of The Vanguard Group, passive indexing can comprise 50-60% of all stock market assets before their being any issues.
4. Tax Reform Power
The $1.5 trillion Trump tax reform has lowered the cost of repatriating overseas dollars and cut the corporate rate from 35% to 21%.
Corporate cash spikes due to the lower taxes, which is then reinvested into the company, used for stock buybacks, and in other shareholder positive ways. The reinvestment improves the bottom line, which in turn helps push the stock market higher.
The benefits are not a one-time thing if the tax reform is not lifted, so I fully expect years of future benefits working to support the stock market.
5. The Rise Of The Machines
The age-old market maxim that the market is driven by human emotions is no longer accurate.
Computer-driven algorithmic trading dominates the stock market with over 90% of all volume, during volatile times, controlled by emotionless machines. During regular times, around 60% of all volume is computer-controlled.
These machines are programmed to buy the dips and don’t make the same mistakes as human traders.
Some pundits believe the machines will lead to an eventual major crash. While this is possible, there is a far more likely scenario.
I think that the rise of the machines will eventually result in the markets going flat, but not crashing, as every bit of edge is slowly squeezed out of the stock market.
Risks To Consider: The stock market is a dynamic system with far more factors in play than can be consistently forecasted. Anything can happen! Always use stop-loss orders when investing.
Action To Take: Continue to buy the dips!