If you have ever gone hiking or backpacking in a remote wilderness, the thought probably wasn\u2019t far from your mind. An encounter with one might be exciting, but possibly dangerous or even deadly. A bear.<\/p>\n
The US stock market reached another major milestone on Friday, when the S&P 500 index closed at another all-time high and further extended the current \u201cbull market\u201d to 3,455 days. A bull market is defined as a stock market that has closed the trading day at least 20% above the last previous low. That last low in the US stock market occurred on March 9, 2009. The S&P 500 closed at 676.53 on that day. The index closed at 2,874.69 on Friday. If you do the math you\u2019ll realize it has been an extraordinary run for investors.<\/p>\n
The stock market came close to breaking its bull market run in October 2011, when the market closed down 19.4% from the previous high. Had it done so, the bull market would have ended and a new bear market would have begun. A \u201cbear market,\u201d as you may have guessed, occurs when the market closes at least 20% below the previous high. <\/p>\n
So, we have not seen a bear market for a very long time \u2013 nearly nine and a half years. So long that some investors may have forgotten what it\u2019s like to experience one. It might be wise to remember that the average bear market brings a loss of nearly 40% for the S&P 500 index. That\u2019s quit a wallop. The good news is that the average bear market typically lasts less than two years (source: S&P Dow Jones Indices).<\/p>\n
Savvy investors know that all bull markets eventually end. Yes, the economy is currently very strong, with historically low unemployment, strong corporate profits, broad economic growth and mild inflation. However, at some point, the bull market will run into headwinds that are too great to overcome. As we look into future, we can point to a number of factors that may slow the economy and derail the stock market\u2019s run. The Federal Reserve is firmly committed to a path of raising interest rates to \u201cnormalize\u201d them, and this creates a headwind for the economy and the stock market. The Trump administration is pushing many of our major trading partners (China, Mexico, Canada and the European Union) for better terms for the transaction of US goods and services across international borders. The administration is using tariffs, which are taxes, and they are not \u2013 despite the administration\u2019s assertions \u2013 good for the economy or for the stock market. The United States has a national debt in excess of $21 trillion and the government is projected to run annual budget deficits in the trillion-dollar range for years to come. At some point, the investors loaning the US money to pay for all of this government spending may begin to seriously question the country\u2019s ability to pay it back. <\/p>\n
Investors can celebrate both the record bull market and the new stock market high. But they should keep their heads up, for a bear is surely lurking ahead.<\/p>\n