It seems like everywhere you look the media is smothering talk about trade wars, Fed policy, and a looming recession. While these are all valid concerns when it comes to the health of the stock market, there’s another equally important facet that needs to be addressed; the market cycle.
Truth be told, markets work in cycles, contrary to what most believe. This basically means that whether the market moves up or moves down is not random and can actually be predicted with a decent level of certainty.
Detailing the stages of a market cycle are a bit academic for the purpose of this article. However, if you’re interested in learning just how those market cycles work, check out this video by Ray Dalio, Founder of Bridgewater Associates.
For now, we’re simply going to look at market cycles from a big picture perspective to give you a good overview of how they work.
Bull and Bear Markets
To make things as simple as possible, think of it this way: the stock market is either going up (bull market), going down (bear market), or is going sideways (stalling).
In short, a bull market is a market which sees a 20% increase in the value of an investment. Bull markets can describe any type of investment vehicle: stocks, index funds, commodities, etc. Inversely, a bear market is a market which sees a 20% decrease in value of an investment.
The current stock market bull run is going on 10+ years, making it the longest bull run in history. The saying “what goes up, must come down” is always good to keep in the back of your mind when talking about such an incredible feat.
We have seen recent declines in the stock market, and this could just be a pullback, or it could be the start of something much more severe. It’s important, however, to note that there is a difference between a bear market and a full on recession. A bear market is typically the start of a full on recession, but there can be a bear market without going into a recession.
“The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” – Sir John Templeton
Where is the stock market right now?
So where are we right now (Q4 2019)? Technically speaking, the bull market is still in tact. However, with multiple sharp sell offs over the past 18 months, the warning signs of a bear market are evident, which is why media outlets are analyzing everything as much as they are.
What should you do with your money then? You have 3 main options:
- Keep your money invested in the stock market. As mentioned, the bull market could continue. This approach is risky (because of the signs that a bear market could be near), but also could yield good results if the market continues to rise.
- Take your money out of the stock market and invest in bonds. This approach guarantees you a return on investment but it will be capped somewhere between 1-4%.
- Put your money under your pillow. This is the ‘safest’ method since you can’t lose it, but also gives you no upside potential.
Each person will have their own decision to make, but our recommendation is to keep your money safe until we get confirmation of either a bear or bull market.